Tian Industries is considering a new project. The project is expected to increase Tians free cash flow by 11.5 million the first year, and this cash flow is expected to decline at a rate of 1% per year from then on. The project will cost 125 million. Tian currently maintains a constant equity-to-debt ratio of 1.5, its corporate tax rate is 36%, its cost of debt is 4%, and its cost of equity is 10.5%.

REQUIRED:

i) How much equity does Tian need to issue to finance the project?

(9 marks)

ii) Does the value of existing equity change?

(3 marks)

iii) Suppose that the cost of the project was 50 million instead of 125 million. Calculate the dividend that could be paid to shareholders as a result of the project.

(3 marks)

iv) Calculate the free cash flow to equity of the project in year 3.

(9 marks)

(Total 24 marks)