ii. The Free Cash flow in year 1 is

iii. The present value of year 2 Free Cash flows is

iv. The present value of year 3 Free Cash flows is

v. The net present value of the project is

iii) The management of Mike is interested in levering up the company. It will do so by means of a sequence of loans of annual maturity. It is anticipated that each of these loans will carry an interest rate equal to the risk free rate. The company will be borrowing every year, so that its outstanding debt grows by 1% per year. If management borrows today 10B what is the present value of all interest rate tax-shields?

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it anticipates sales of 100,000 in each of the three years. The costs of goods sold will be 50% of the sales. The corporate tax rate is 35% and the anticipated changes of working capital are -5000 for years 1,2 and 10,000 for year 3. To realize this project, Epiphany needs to purchase equipment worth 90,000 at the start of the project which will be depreciated by the straight line method in the next three years. For each of the following questions choose the closest answer.

i. The annual depreciation is

v. What would be the discount factor for the free cash flows two years ahead, if the target leverage ratio is 60% one year from now and 30% two years from now, with cost of debt 5% and 3% respectively? Assume for both of these years debt rebalancing is annual.

Assume that investors in Alphabet pay a 15% tax rate on income from equity and a 25% tax rate on interest income. If Alphabet were to issue sufficient debt to reduce its taxes by $600 million per year permanently, then the effective tax advantage of this debt would be closest to:

ii) If Mike has 2 billion shares and it trades at its fundamental value, what is its current stock price?

iv. How would your answer change, if, going forward the firm rebalances its debt annually?