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Board Gear Corp. $($BG$)$ is considering manufacturing a new model of paddleboard. This project would require an investment of $$315,000$ plus an

additional $$32,000$ in working capital. The equipment is in the $20\%$ CCA rate class, and BG has a tax rate of $25\%.$ BG thinks they can sell $200$

boards a year for $5$ years, after which the equipment will have a residual value equal to its undepreciated capital cost and will be sold for that

amount. The working capital will be recovered. The boards will sell for $$1,800.$ Fixed yearly manufacturing costs are $$90,000,$ and variable costs

are $$600$ per board. BG$\text{'}$s cost of capital is $12\%.$ BG uses the accelerated investment incentive, so CCA in Year $1$ is $1\mathrm{.}5$ times the prescribed rate.

Calculate the yearly cash flow and the NPV of the project. Should they go ahead with the project? Provide all calculations to support your decision.

$(40$ marks$)$

Refer to the observed capital structures given in Table $16\mathrm{.}7$ from Section $16\mathrm{.}9$: Observed Capital Structures of the textbook. What do you notice

about the types of industries with respect to their average debt$/$equity ratios? Are certain types of industries more likely to be highly leveraged than

others? What are some possible reasons for this observed segmentation? Do the operating results and tax history of the firms play a role? How

about their future earnings prospects? Explain. $(10$ marks$)$

Hot$-$Shoe Hikers is an all$-$equity firm with a total market value of $$715,000.$ The firm has $46,000$ shares of stock outstanding. Management is

considering issuing $$158,000$ of debt at an interest rate of $8\%$ and using the proceeds to repurchase shares. Before the debt issue, EBIT will be

$$63,200.$ What is the EPS if the debt is issued? Ignore taxes. $(5$ marks$)$

A gym owner is considering opening a location on the other side of town. The new facility will cost $$1\mathrm{.}56$ million and will be depreciated on a

straight$-$line basis over a $20-$year period. The new gym is expected to generate $$577,000$ in annual sales. Variable costs are $40\%$ of sales, the

annual fixed costs are $$94,100,$ and the tax rate is $21\%.$ What is the operating cash flow? $(5$ marks$)$

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