Part A [5 points] Short Project, Inc.'s assets generate EBIT = $1,000 for the first year (year 1) and grows at 5.0% each year over the next four years (so the total project lasts for five years). The expected return/discount rate for the firm's assets is assets is TA = 10.0%. ShortProject, Inc. can locate its business either in NorthTax country, where it incurs a tax of tNT = 20%, or in South Tax country, where it incurs a tax of tST = 10%. In both cases ShortProject considers a financing strategy that involves both equity and debt as follow: debt has an annual coupon of c= 5.0%, a yield to maturity of ro = 4.0%, face value D = $300 and maturity in 5 years (that means the debt face value has to be repaid in year 5). i. [1 point] Shannon, an advisor to Short Project, Inc., argues that since the tax rate is lower in South Tax country and everything else (EBIT and all other discount rates) is the same in both countries it must be the case that the tax shield has to be lower if Short Project, Inc. locates its business in SouthTax country and thus it will decrease the value of its company. Is Shannon correct? ii. [2 points] If the shareholders of Short Project, inc. would vote for the location, what would they prefer? iii. [2 points] Are shareholders vote and Shannon recommendation aligned? Please explain and provide support for your argument. Part B [10 points] Long Project, Inc.'s assets generate EBIT = $1,000 for the first year (year 1) and grows at 5.0% each year after in perpetuity (so the EBIT for year 2 is $1,050 and so on growing in perpetuity). The expected return/discount rate for the firm's assets is assets is TA = 10.0%. The tax rate is t = 20.00%. Long Project considers two financing strategies: A. Unlevered equity B. Levered equity and debt - in which case the debt has an annual coupon of c = 5.0%, a yield to maturity of ro = 4.0%, face value D = $300 and maturity in 5 years (that means the debt face value has to be repaid in year 5); for this strategy, after year 5 when the debt is repaid, the project continues with only equityholders receiving cash from the project i. [2 points] What is the value of the unlevered equity and the value of the unlevered firm? ii. [2 points] What is the value of the levered equity if Financing Strategy B is adopted? What is the implied discount rate for equity? iii. [3 points] What is the implied discount rate for equity if Financing Strategy B is adopted? iv. [1 points] What is the value of the debt if Financing Strategy B is adopted? v. [1 points] What is the value of the levered firm? vi. [1 points] What is the value of the tax shield? Where is this tax shield coming from? Part A [5 points] Short Project, Inc.'s assets generate EBIT = $1,000 for the first year (year 1) and grows at 5.0% each year over the next four years (so the total project lasts for five years). The expected return/discount rate for the firm's assets is assets is TA = 10.0%. ShortProject, Inc. can locate its business either in NorthTax country, where it incurs a tax of tNT = 20%, or in South Tax country, where it incurs a tax of tST = 10%. In both cases ShortProject considers a financing strategy that involves both equity and debt as follow: debt has an annual coupon of c= 5.0%, a yield to maturity of ro = 4.0%, face value D = $300 and maturity in 5 years (that means the debt face value has to be repaid in year 5). i. [1 point] Shannon, an advisor to Short Project, Inc., argues that since the tax rate is lower in South Tax country and everything else (EBIT and all other discount rates) is the same in both countries it must be the case that the tax shield has to be lower if Short Project, Inc. locates its business in SouthTax country and thus it will decrease the value of its company. Is Shannon correct? ii. [2 points] If the shareholders of Short Project, inc. would vote for the location, what would they prefer? iii. [2 points] Are shareholders vote and Shannon recommendation aligned? Please explain and provide support for your argument. Part B [10 points] Long Project, Inc.'s assets generate EBIT = $1,000 for the first year (year 1) and grows at 5.0% each year after in perpetuity (so the EBIT for year 2 is $1,050 and so on growing in perpetuity). The expected return/discount rate for the firm's assets is assets is TA = 10.0%. The tax rate is t = 20.00%. Long Project considers two financing strategies: A. Unlevered equity B. Levered equity and debt - in which case the debt has an annual coupon of c = 5.0%, a yield to maturity of ro = 4.0%, face value D = $300 and maturity in 5 years (that means the debt face value has to be repaid in year 5); for this strategy, after year 5 when the debt is repaid, the project continues with only equityholders receiving cash from the project i. [2 points] What is the value of the unlevered equity and the value of the unlevered firm? ii. [2 points] What is the value of the levered equity if Financing Strategy B is adopted? What is the implied discount rate for equity? iii. [3 points] What is the implied discount rate for equity if Financing Strategy B is adopted? iv. [1 points] What is the value of the debt if Financing Strategy B is adopted? v. [1 points] What is the value of the levered firm? vi. [1 points] What is the value of the tax shield? Where is this tax shield coming from