1. You are planning a major product expansion. To implement this strategy, you will need to build a new plant in Newark. You estimate that the cost of the plant and equipment is $200 million. You expect annual sales of $75 million for 25 years. Costs are expected to be 60% of sales. Assume straight line depreciation and that the salvage value of the plant at time 25 is zero. Accounts Receivable is 35% of next year sales. Cash is 10% of next year sales. Inventory is 15% of next years sales. Accounts Payable is 30% of next years sales. Your tax rate is 34%. Your balance sheet information is as follows:

Capital Structure	Book Value	Coupon Rate	# of units	Price per Unit	Maturity
Bonds	$100 million	5%	100,000	$1,050	10 years
Debentures	$200 million	6%	200,000	$1,000	11 years
Subordinated Debentures	$100 million	7%	100,000	$950	12 years
Common Stock	$400 million		15 million	$50
Retained Earnings	$600 million

Assume that the beta of the common stock is .8 and the market risk premium is 9%. Assume that the risk free rate is 3%. Assume that all interest payments are made annually. Determine the NPV and IRR of the project. Would you expand? (12 points)

2. You are the CFO of the firm in problem 4. Determine the Degree of Operating Leverage, the Degree of Financial Leverage, the Total Degree of Leverage of your firm, assuming that Sales are $400 million, Fixed Costs are $150 million and Variable Costs are 30% of Sales. Determine the expected percentage change in earnings if Sales increase by 25%. (8 points)

3. Again, assume you are the CFO of the firm in problems 4 and 5. There is a proposal for the firm to issue $100 million of subordinated debt and use the proceeds to repurchase common stock shares. Assume you can repurchase a share at $50 per share. Determine the break-even sales point in terms of EPS between the level of debt financing in problem 4 and the new level of debt financing. What do you recommend? (10 points)