a$)$ Globas Industries adjusts its debt so that its free cash flow is constantly five times

its interest expenses. Globas is considering a project that will generate free cash

flows of $2\mathrm{.}48$ million this year which are expected to grow at a rate of $4\mathrm{.}5\%$ per

year from then on$.$ Suppose Globas$$ unlevered cost of capital is $9\mathrm{.}6\%$ and its

marginal corporate tax rate is $36\%.$

REQUIRED:

I. What is the levered value of the project?

II$.$ If Globas pays $4\mathrm{.}1\%$ interest on its debt, what is the amount of debt it will

take on initially for the project?

III. Show that the levered value of the project using the WACC method matches

the result you obtained in part $($I$).$

b$)$ As the CFO of Mina Labs, you are considering an R&D project with mutually

dependent phases. Explain how you can evaluate the project and which factors

you should consider.

c$)$ A project has a life of six years. You want to calculate the present value of the

final$-$year interest tax shield. When would the formula below be used to calculate

the present value of the interest tax shield? Explain the rationale for using this

formula:

PV $($ITS$6)=$ ITS$6/(1+$ Ru$)^5+(1+$Rd$)$

d$)$ Dynamic Industries is considering a new project. The project may begin today or in exactly two years. The project will cost $11\mathrm{.}5$ million to start today. The cost of

starting the project in two years is $13$ million. You expect the project to generate

$1,200,000$ in free cash flow per year forever. The risk$-$free rate is $4\%.$ The

expected return on the market is $8\%,$ and beta for projects of similar risk is $1\mathrm{.}5.$ The

variance of the project$$s cash flows is $12\mathrm{.}25\%.$

I. What is the value of the option to wait until year $2$ to start the project?

II$.$ Should you begin the project today or wait for two years?