10. Catnav Supplies is considering a new project that will require an initial investment in equipment and result in an operating cash flow of $1.8 million at the end of the first year, and the operating cash flow will grow at a rate of 2% per year indefinitely. The firm has a target debt-equity ratio of 0.80 . Its pretax cost of debt is 9%. A comparable firm (SC Corporation) with the same capital structure, cash flow risk and same WACC has just paid a dividend of $0.4. SC's stock price is $4.16, and its dividend is expected to grow at 4% per year. Tax rate is 40%. The current 3 -month Treasury Bill rate is 1.60%. The market risk premium is 7%. Assume that CAPM holds. a) What is the cost of equity and beta of Catnav Supplies? (6 points) KE=1+160.4kc=0,1362 b) The new project that Catnav Supplies is considering has a beta of 2 . This project will be financed by equity only. Under what circumstances should the company take on the project, if there is to be no incremental investment in working capital? Also, there is no depreciation of capital equipment for the project and there is no salvage value. (6 points)