Please do all calculations in excel. Make sure to label your answers clearly and completely.

Problem 1: You are considering investing in a project that costs $25,000,000 and are evaluating which capital structure is most beneficial to shareholders. Currently financed only with equity, the company currently has a beta of .8. If the company borrows money for the project, the cost of borrowing will be as follows: Total Debt Cost of debt $5,000,000 5% $10,000,000 5.25% $15,000,000 6% The expected market return is 10% and the risk free rate is 2%. The corporate tax rate is 30%.

Part of the project will be funded by selling a 7 year asset that was purchased 4 years ago for $8,000,000. The old asset has a current market value of $1,000,000. If kept in operation, the old asset would produce EBDITA of $1,000,000 next year and likely be non-productive thereafter. The new asset is projected to produce EBIDTA at the at a constant rate of $10,000,000 per year for 7 years. The project uses assets with a 5 year depreciable life and have no salvage value after 6 years. 1. What return should shareholder expect at each capital structure based on CAPM? 2. What are the incremental cash-flows of the proposed project? 3. What is the appropriate discount rate for each capital structure? 4. How much value is created for shareholders using each of the proposed capital structures? 5. Based on your calculations, which capital structure produces the best return for shareholders based on the risk(s) taken?