DataCorp's capital structure consists of debt and common shares. The
after-tax cost of
debt is 8% p.a., while the cost of equity is 14% p.a. DataCorps's
weighted average cost of
capital of 12% p.a. The corporate tax rate is 30%.
There are 5 million common shares outstanding. The company's earnings
before interest and
taxes (EBIT), which are assumed to be the same as cash flows, for the
current year are $12
million and are expected to remain at this level forever.
Consider another company (let's call it "TapeCorp."). Tapecorp is
similar to DataCorp in
all respects except that TapeCorp has no debt in its capital structure.


(a)  What are DataCorps's market price per share and earnings per share? What
about TapeCorp's? [Remember that TapeCorp also has 5 million shares
outstanding and has
the same EBIT as DataCorp's.]

(b) TapeCorp is considering an investment project. The project costs $10 million
and will generate cash inflows of $1.2 million per year forever. The
risk of the project is
the same as TapeCorp's overall risk. Should TapeCorsp accept this project?