Your firm which is headquartered in US isconsidering a5-yearinternational project, anadditionofnewproductlinetoyour existing product lines inEurope. Thenew product linewould require a purchase ofnewequipment with a price of 600,000. The equipment will be depreciated entirely to 0 using straight-line method for 5 years for the tax reporting purpose.

The new productlineis expected to generate 760,000 for year 1 and to increase its sales at a growth rate of 3% for next 4 years. After 5 years, the new product line will become useless.Production costs(excluding depreciation) are estimated at 500,000 for year 1 and will also increase by 3% per year. Selling and administration expenses will remain at 90,000 per year.Net working capitals (NWC) is projected to remain at 10% of projected sale of each year and will be financed through operating cash flowat the endof each year. Any remaining NWC will befullyrecovered in cash at the sale of the equipment at the end of fifth year.

To finance this project (600,000), you plan to issue 5-year annualeuro-denominatedbondsat parin Europe. According to your financial advisor, you can raise up to300,000 by issuing5-year annual 12%coupon bondsat par. However, you need to issue5-year annual 14%coupon bondsat parfor additional capitals above300,000.

Below is the information you will use to estimate the cost of capitals. Your target capital structure depends on whether you will issue new equities in Europe or US. You should choose only one equity market (US or Europe) to issue new equities.

Equity Market

US

Europe

Equity Risk Premium

6%

7%

Risk free rate

4%

4%

Beta

0.9

1.0

Target capital structure (Debt/(Debt+Equity))

0.5

0.6

The project will pay a 40% tax rate. The current exchange rate between USD and Euro is $1/ and remains constant.You assume that EBT (Earing Before Tax) is the same as taxable income. (You do not need to recalculate tax)

Q6) Regarding the equipment,calculate annual depreciation expense.

Q7) Estimate incremental cash flows to satisfy NWC requirement each year.

Q8) If you choose to issue new equitiesin Europe, you are expected to pay a dividend of 4 per share in first year and the dividend will increase at a rate 3% per year afterwards.

1.Calculate total amount of debts you need to issue in order to meet your target capital structure.

2.Calculatethe number, not amount of equities(stocks)you need to issue (Use Gordon constant growth model)

3.Calculate after-tax cost of debts and cost of capitals.

4.Estimate annual expected cash flow from operation.

5.Calculate NPV

Q9) Assuming that you decide to issue new equitiesin US,

1.Calculate total amount of debts you need to issue in order to meet your target capital structure.

2.Calculate after-tax cost of debts and cost of capitals.

3.Estimate annual expected cash flow from operation.

4.Calculate NPV

Q10) Based on your answers to questions (3) and (4),

1.Which market (US or Europe) will you choose to issue new equities and why?