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The Soy Company has ongoing two projects called "Project 1" and "Project 2". Project 1 employs 40% debt, 30% common stock and remainder for preferred stock. Project 2 employs equal distribution of debt and equity. Equity is also equally distributed amongst preferred and common stock. The total capital employed for both projects are same of 40 million. For both projects at present, preferred stock can be sold yielding 15%. The current borrowing rate of both projects is 13 percent, and the company's tax rate is 40 percent. The company has thought about using the capital-asset pricing model in this regard. It has identified two samples with modal value betas of 1.8 for Project 1 and 0.6 for project 2. The risk-free rate is currently 10 percent and the expected return on the market portfolio 17 percent.
Required:
Question a. Calculate required rate of return of equity of Project 1 and Project 2.
Question b. Calculate Weighted Average Cost of Capital of Project 1 and Project 2
Calculate Economic Value Added if the net profit after taxes of Project 1 were 15 million and for Project 2 were 18 million.
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