1. Compute the weighted average cost of capital for RIC Inc. using the following information: RIC Inc. has decided to finance this product line expansion by raising new capital. The companys optimal capital structure calls for 35% debt, 40% equity, and 25% preferred stock. RIC Inc. can issue a series of 8% coupon bonds with a $1000 par value. The bonds will mature in 10 years and will sell for $946 minus an issuance cost of $5. RIC Inc.s marginal tax rate is 35%.

RIC Inc.s common stock is currently selling for $22 per share. Its present dividend is $1.96 a share and the expected long-term dividend growth rate is 8.5%. What is the cost of external equity for RIC Inc. assuming an issuance cost of $2.00 per share?

RIC Inc. has just issued shares of preferred stock that pay an annual dividend of $2.15. The preferred stock was sold to the public at a price of $52.00 per share with issuance cost of $2.00 per share. What is the marginal cost of preferred stock for RIC Inc.?

2. Using the incremental cash flows below, compute the following and state in each case whether the company should go ahead with the project.

The WACC is 10%. a. Payback b. NPV c. IRR d. Profitability Index

Cash Flows

0 500,000

1 100,000

2 120,000

3 150,000

4 190,000

5 250,000