Im having trouble with the below question could someone plea

I\'m having trouble with the below question, could someone please help me answer part i, j & k? Thank you.

Q Corporation and R Inc. are two companies with very similar characteristics. The only difference between the two companies is that Q Corp. is an unlevered firm, and R Inc. is a levered firm with debt of $5 million and cost of debt of 10%. Both companies have earnings before interest and taxes (EBIT) of $2 million and a marginal corporate tax rate of 40%. Q Corp. has a cost of capital of 15%.

i.    What principle have you proven in this case?                                                      (1 mark)

j.    Both companies are now evaluating a project that requires an initial investment of $1.15 million and that will yield cash inflows of $500,000 per year for the next three years. Assume that this project has the same risk level as the individual firm’s assets. Should Q invest in this project? Should R invest in this project?                                              (5 marks)

k.   Based on your results for part (j), discuss the effects of leverage and its tax shields effects on the future value of the two firms.                                        (1 mark)

Solution

Solution: i) The principal proven in this fact is Weighted Average Cost of Capital. j) From Q point of View: Year Cash Flow Disc Factor@10% Present Value 0 -1150000 1 -1150000.00 1 500000 0.869565217 434782.61 2 500000 0.756143667 378071.83 3 500000 0.657516232 328758.12 NPV -8387.44 Q should not invest in the project due to negative NPV. From R point of view: Year Cash Flow Disc Factor@15% Present Value 0 -1150000 1 -1150000.00 1 500000 0.909090909 454545.45 2 500000 0.826446281 413223.14 3 500000 0.751314801 375657.40 NPV 93426.00 R should invest in the project due to positive NPV. k) Due to the financial leverage R enjoys a balance between the capital structure which provides various benefits to R. The cost of capital is also less in R in compare with Q. R will also enjoy the benefit of tax shield. The total interest cost is $2 million and tax rate is 40%. So the tax shield is =$(2*40%) = $0.8 million