1.) How many breaks are in the MCC schedule? At what dollar amounts do the breaks occur and what causes them?

2.) What is the weighted average cost of capital in each of the intervals between the breaks?

3.) What are the IRR values for Project 1 and 3?

4.) Graph the IOS and MCC schedules?

5.) Which projects should Town and Country's management accept?

6.) What assumptions about project risk are implicit in this problem?

7.) If you learned that Projects 1,2, and 3 were of above-average risk, how might this affect the situation of your decision?

8.) The problem stated that Town and Country Finance pays out 60% of its earnings and dividends.

a. How would the analysis change if the payout ratio was increased to 90%

b. If it decreased to 40%?

c. How would these changes affect the break point in problem 4?

Homework \#12 - Cost of Capital Recommended: Print out homework and handwrite Town and Country Finance has the following capital structure, which it considers to be optimal under current and forecasted conditions: For the coming year, management expects after-tax earnings of $2.5 million. TCF's past dividend policy of paying out 60 percent of earnings will continue. Current commitments from its banker will allow TCF to borrow according to the following schedule: The company's marginal tax rate is 40%, the current market price of its stock is $22 per share, its last dividend was $2.20 per share, and the expected growth rate is 5%. External equity (new common stock) can be sold at a flotation cost of 10%. Town and Country has the following investment opportunities for the next year: Management asks you to help determine which projects (if any) should be undertaken. You proceed with this analysis by answering the following questions (or performing the tasks) as posed in a logical sequence. Questions on the next page