Answer Happy

QUESTION ONE
The Chief Finance Officer (CFO) of Adelpha Ltd, a UK-based
manufacturer of small consumer goods, asks you to provide a report
for the board concerning a new product line. The new line has a
lifespan of 10 years, and the CFO hopes that it will contribute
substantially to strengthening the firm's balance sheet.
Currently, Adelpha has assets worth £40m. The table below sets out
the known details of the firm's balance sheet:
BE311-5-SP/2
Total assets Debt Equity
The market data available are as follows:
The risk-free rate of return
The average return on the market index
Value
£40m £30m £10m
Cost of capital
12% 6% ?
£30m £20m £2m £4m
£25m £5m
£6.5m £1.5m
1.5 0.4
The investment project's data are as follows: The project's
investment cost
The tangible part of the investment (equipment) Annual
depreciation of equipment
The expected resale value of equipment in year 10
New equity issued New debt issued
The annual revenue flow year 1 through 10 The annual cost year 1
through 10
The beta-risk of the project
The beta-risk of total debt after the issue
3% 7%
Your report should address the following questions:
a) What is the cost of capital for the project?
b) What is the net present value of the investment?
c) What is the new cost of capital for the company after
the investment?
d) What is the cost of equity capital before and after the
investment?
(5 marks) (20 marks) (10 marks) (15 marks)