1. A firm is considering selling $30 million worth of 30-year, 9% coupon bonds with a par-value of $1,000. Because bonds with similar risk earn a return greater than 9%, the firm must sell the bonds for $980 to compensate for the lower coupon interest rate. The flotation costs are 3% of par.

The firm is also considering an issuance of 300,000 shares of 10% preferred stock that they expect to sell for $82 per share. The cost of issuing and selling the stock will be $4 per share.

The firm plans to sell shares of common stock that have already been issued. The firms common stock has a market price of $98 per share and expects to pay a dividend of $5.61 per share at the end of 2013. The dividends paid on the outstanding stock over the past years ranged from $4.00 in 2008 to $5.24 in 2012.

The firm has determined its optimal structure should be 30% of debt, 20% of preferred stock, and 50% of common stock.

The firm has earnings before interest and taxes (EBIT) of $17,000,000 and interest expense of $2,700,000. The firms applicable tax rate is 40%.

Based on the firms financing plans as noted above, what is the value of the firm?

2. What is the profitability index of a project if the initial cost of the project is $40,000 and the cash flow at the end of year 1 is $20,000, year 2 is $30,000, year 3 is $10,000, and year 4 is $30,000 and the applicable interest rate is 9%?

1. 1.81
2. .81
3. .77
4. 1.77