$(14$ points$)$ Rolodex, Inc. is in the process of determining its capital budget for the next fiscal year. The

firm's current capital structure, which it considers to be optimal, is contained in the following balance

sheet:

Rolodex, Inc. Balance Sheet $($in millions of $$)$

Discussions between the firm's financial officers and the firm's investment and commercial bankers

yielded the following information:

Debt: Rolodex can borrow $$40$ million from its bank at a pre$-$tax cost of $13\%.$ After using up its

bank loans, Rolodex can borrow $$80$ million by issuing bonds at a net price of $$687$ per bond. The

bonds would carry a $10\%$ coupon rate $($paying its interest twice a year$)$ and mature in $20$ years.

Additional bonds can be issued at a pre$-$tax cost of $16\%.$

Preferred: Preferred stock can be issued at a pre$-$tax cost of $16\mathrm{.}5\%.$

Equity: Rolodex can generate $$140$ million in net income and pay a $$2$ dividend per share. The $$2$

dividend per share $($D$1)$ represents a growth of $5\mathrm{.}5\%$ over the previous year's dividend. This growth

rate is expected to continue for the foreseeable future. The firm's stock is currently trading at $$16$

per share. Rolodex can raise external equity by selling common stock at a net price of $$15$ per

share.

Tax: Rolodex's marginal tax rate is $40\%.$

The following are the available investment opportunities $($all projects are non$-$divisible$)$:

a$.(10$ points$)$ Plot Rolodex's marginal cost of capital schedule. Show your work.

b$.(2$ points$)$ Plot Rolodex's investment opportunity schedule.

c$.(2$ points$)$ Determine Rolodex's optimal capital budget and marginal cost of capital.