QUESTION TWO

PS plc is evaluating a seven$-$year project in the renewable energy sector. The initial outlay is K$5\mathrm{.}8$ million and the expected cash flows originating from the project are K$700,000$ for the first year, then increasing by K$250,000$ each year in years $2$ and $3,$ then remaining at year $3$ level for year $4$ and $5$ before reducing to K$1,000,000$ per year for year $6$ and $7.$

The project will be financed purely by equity. PS has an equity beta of $0\mathrm{.}95$ while the yield on treasury bills is $7\%.$ The expected market return is $11$ percent.

REQUIRED:

$K_e=$

a$)$ Calculate the cost of equity for PS plc$.$

$[2$ marks$]$

b$)$ Calculate the MIRR for the project and comment on the viability of the project. $[12$ marks$]$

c$)$ Briefly discuss any THREE practical factors that may influence a firm's decision to use debt finance in its capital structure.

$[6$ marks$]$

$[$Total: $20$ marks$]$