1.

ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 116 percent of face value. The issue makes semiannual payments and has an embedded cost of 10.6 percent annually.

Requirement 1:

What is ICUs pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Pretax cost of debt

%

Requirement 2:

If the tax rate is 40 percent, what is the aftertax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Aftertax cost of debt

%

2.

Organic Produce Corporation has 8.1 million shares of common stock outstanding, 560,000 shares of 7.1 percent preferred stock outstanding, and 181,000 of 8.3 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.60 per share and has a beta of 1.26, the preferred stock currently sells for $107.40 per share, and the bonds have 16 years to maturity and sell for 93 percent of par. The market risk premium is 6.85 percent, T-bills are yielding 5.55 percent, and the firms tax rate is 30 percent.

Required:
(a)	What is the firm's market value capital structure? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)

Market value weight of debt
Market value weight of preferred stock
Market value weight of equity

(b)	If the firm is evaluating a new investment project that has the same risk as the firms typical project, what rate should the firm use to discount the projects cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Weighted average cost of capital

%