SCA Ltd. generated $ 30 million in EBITDA on revenues of $ 200 million in the most recent year. You are considering investing (at year 0) $ 12 million in a new delivery system and in efficient plant; the investment is depreciable straight line over 5 years to a salvage value of 2 million. Due to the new delivery system and new plant, you expect to see three primary benefits:

Revenues, which had been expected to be flat ($200 million each year) for the next 5 years, will have the following expected values: $215 million next year, $ $220 million in year 2, $230 million in year 3 and $235million in year 4 and 5.

The EBITDA margin will increase, on the incremental revenues only, to 20% for the next 5 years You do expect your non-cash working capital, which is currently 10% of revenues, to drop to 5% of revenues immediately and remain at that percent level each year for the next 5 years. The salvage value of working capital at the end of year 5 will be equal to the book value.

The marginal tax rate is 40% and the current cost of capital is 10%. The company has 20 million shares, trading at $10 dollar/share and $800 million in debt.

a. Estimate the incremental free cash flow to firm of the investment

b. Estimate the Modified internal rate of return

C. Assume that SCA Ltd. decides to move to the optimal debt ratio. The optimal debt ratio is achieved through a swap of equity for debt: the bondholders are willing to accept 10 million newly issued shares in exchange for 100 million in debt. The WACC (at its optimal debt ratio) becomes 8.5%. Estimate the increase in firm value generated by the optimization of capital structure, assuming that the firm is in perpetual growth, growing 2% a year forever and estimate the equity value per share at the optimal debt ratio.