Please Answer Question 2 Only:

You have the following initial information on CMR Co. on whichto base your calculations and discussion for questions 1) and2):
• Current long-term and target debt-equity ratio (D:E) = 1:4
• Corporate tax rate (TC) = 30%
• Expected Inflation = 1.75%
• Equity beta (E) = 1.6385
• Debt beta (D) = 0.2055
• Expected market premium (rM – rF) = 6.00%
• Risk-free rate (rF) = 2.15%

^{1) The CEO of CMR Co., for which you are CFO, has requestedthat you evaluate a potential investment in a new project. Theproposed project requires an initial outlay of $7.15 billion. Oncecompleted (1 year from initial outlay) it will provide a real netcash flow of $575 million in perpetuity following its completion.It has the same business risk as CMR Co.’s existing activities andwill be funded using the firm’s current target D:E ratio.
a) What is the nominal weighted-average cost of capital (WACC) forthis project?
b) As CFO, do you recommend investment in this project? Justifyyour answer (numerically).}

Please Answer Question 2 Only:

2) Assume now a firm that is an existing customer ofCMR Co. is considering a buyout of CMR Co. to allow them tointegrate production activities. The potential acquiring firm’smanagement has approached an investment bank for advice. The bankbelieves that the firm can gear CMR Co. to a higher level, giventhat its existing management has been highly conservative in itsuse of debt. It also notes that the customer’s firm has the samecost of debt as that of CMR Co. Thus, it has suggested use of atarget debt-equity ratio of 2:6 when undertaking valuationcalculations.
a) What would the required rate of return for BFS Co.’s equitybecome if the proposed gearing structure were adopted followingacquisition by the customer?
b) Would the above project described in 1) be viable for the newowner of BFS Co.? Justify your answer (numerically).

Please Only answer Question 2: Question 1 has beengiven for context of the question