Zeta Inc. has a perpetual expected annual EPS (after tax) of $2 and 1 million shares of common stock outstanding. The company also has $5 million debt outstanding (valued at market) with a yield to maturity of 8 percent. The corporate tax rate is 30 percent, and Treasury bills currently yield 2.5 percent. The covariance of Zeta Inc. stock and the market portfolio is 0.05. The market portfolio has an expected return of 20% and a standard deviation of 0.2. The company is considering an investment project which will generate perpetual expected earnings before interest and tax (EBIT) of $10 million per year, with the first cash flow starting 1 year from now. The covariance of the return of this project with that of the market portfolio is 0.1. This investment requires an upfront cost of $15 million. If the company decides to invest in this project, it will finance half of the investment cost with debt and the rest with equity. Assume the risk of the debt of Zeta Inc. remains unchanged, and ignore personal taxes.

a) Is the new investment project riskier than Zetas current business? Explain with supporting calculations. (2pts) b) What is the current (i.e., before undertaking the investment) market value of Zeta Inc. and what is its WACC? (3 points). c) Should Zeta Inc. undertake the investment? Explain with supporting calculations. (5pts) d) Suppose the risk of the debt of Zeta Inc. does change. Will your conclusion in part c) change? Explain (3pts)