Cost of capital and project evaluation Wormling Company operates several sheet metal fabricating shops. It is capitalized with the following securities:

□ $500,000 of 12% bonds trading in the market at 80

□ 60,000 shares, $100 par $7 preferred stock trading at $50 per share

□ 20,000 shares, $2 par common stock trading at $25 per share The company is subject to a 40 percent income tax rate. It pays $4.50 of cash dividends on its common stock annually. It is planning to acquire a new sheet metal brake for one of its shops. The equipment costs $75,550 and has a useful life of 8 years and no salvage value. Cost savings from operating the new equipment are estimated at $17,000 per year.

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REQUIRED a. Estimate the firm's cost of capital. b. Compute the net present value of the new equipment using the cost of capital. c. Compute the profitability index.