Project financing Suppose an unlevered firm has a perpetual cash flow and market value ofEBIT = 100E = 1000The number of outstanding shares is, N = 500The firm considers investing in a project that costs $300 and returns a perpetual cash flow of $40.Cost = 300Cash flow = 40a) Should the company invest in this project?b) Now suppose the company will invest in this project. If the company issues equity to fund the project, what would be the project’s impact on: – Earning per share? – Number of shares? – Share price?- P/E ratio?c) If the company issues debt to fund the project, what would be the project’s impact on: – Earning per share? – Number of shares? – Share price?- P/E ratio? – Cost of equity capital?Assume the debt is risk-free, Rf = 5%
