As a recent graduate, you have been hired by Canadian Communications Inc. (CCI), a large industry leader in the Canadian telecommunications market. CCI is contemplating investing in an upgraded wireless communication service platform known as 5G technology. Based on the company€™s forecast it is believed that the new investment will last for 3 years before it has to be upgraded with faster speeds. The investment in 5G technology will require an initial net working capital outlay of $175,000,000 and is to be financed using an equal weighting of equity and debt (ignore flotation costs). Its most recent statement of financial position is shown below as well as CCI€™s list of non-current liabilities:

CCI currently has 800,000,000 shares outstanding and was last traded at a price of $23.50 per share. CCI€™s tax rate is 35%. The CFO is wondering whether the investment in 5G technology is value enhancing and has asked you to provide your analysis. In particular he wants you to do the following:

a. Calculate CCI€™s market value of equity, market value of debt, and after-tax cost of debt.

b. The CFO has determined that the industry beta contains fewer estimation errors. He has mandated the use of an industry beta comprising the major tele-communication companies in Canada. For reference, find the betas of BCE Inc., TELUS Corporation, Manitoba Telecom Services Inc., and Rogers Communications Inc. to use in the calculation of an industry beta.

c. The current risk-free rate is 2%, and the market risk premium is 4.5%. Calculate the cost of equity.

d. Calculate the WACC.

e. With the completion of the project, CCI will incur estimated annual fixed costs of $90,000,000. CCI forecasts an increase in its service prices, for customers, to an average of $85 per month. Variable service costs incurred per customer are, on average, $10. In addition, the company has forecast an adoption rate of 500,000 users in the first year, 1,000,000 in the second year, and 3,500,000 by the third year. Find the project€™s projected operating cash flows.

f. What are the project€™s IRR and NPV? Should the project be undertaken by CCI?

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Canadian Communications Inc Statement of Financial Position As of December 31, 20X0 (i n millions) Liabilities and shareholder's equity s 7,000 Property, plant and equipment 33,000 Non-current liabilities 21,000 S28,000 $12,000 S40,000 Assets Current assets S 5,000 Current liabilities Other 2,000 Total liabilities Shareholder's equity Total assets S40,000 Amount Yield to outstanding Issuer Cu PricMaturity maturity (in S millions) 6.8 5.1 6.3 110 106.8 15/3/20x1 4.8 109.3 20/8/20x1 4.7 28/6/20X0 1.25 CCI CCI CCI CCI $ 500 3,500 5,000 12,000 $21,000 91.5 1/2/20X6 5.75