New Arc Co is a large conglomerate that produces movies and Hanafuda playing cards. Historically, the firm's

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New Arc Co is a large conglomerate that produces movies and Hanafuda playing cards. Historically, the firm's cash flows have been generated equally by the two business lines. The movie business, New Arc Cinemas, is considering a new project. Project X involves hiring Piotr Jaxson to transform the legend of Tiddalik the Frog into a 10 part movie extravaganza.

Information for Questions A through D You have the following financial information that applies to Questions A through D:

Business information:o Wall Street analysts believe that 71% of the firm's value derives from its movie business with the remainde deriving from the playing cards.

New Arc Co has a total of $1.0 billion in cash on the balance sheet.

The firm pays taxes at an overall rate tax rate of 30.0% and a marginal tax rate of 45.0%

Debt information:

o Nine years ago, New Arc Co issues 10.3 million bonds each with a face value of $1,000 for a total face value of $10.3 billion.These bonds were issued with a ten-year maturity and paid annual coupons of at 3.3%

When these bonds were issued, New Arc Co debt carried an AA credit raining. At that time, AA rated bonds traded at a credit spread of 7.0%

The bonds are currently on the balance sheet with a book value equal to their initial total face value of $10.3 billion

The bonds just made a payment- i.e., final payment is due in exactly one year - and a $1,000 face value bono is currently priced at $855.77.

Equity information:o New Arc Co outstanding equity has a book value of $10.3 billion and a market value of $12.5 billion. The stock has a beta of 0.69.

o Competing movie studios are all equity financed. Market participants expect these stocks to return 11.00% per year on average.

Competing Hanafuda companies are all equity financed and have an average beta of 0.29

The risk-free rate is 4.2% and the market risk-premium is 8.5%

1. When calculating the weighted average cost of capital for the project, what is the weight of debt as a fraction?

2. What is the pre-tax cost of debt for the project as a percentage?

3. If New Arc Co expects to finance the project at its current capital structure, what is the correct cost of equity to use for this project as a percentage?

4. What is the cost of capital for the project as a percentage?