1. In 1975, what single corporate-wide WACC did Enzone plan to use? Is this number correct? Criticize (a) the numbers, and, (b) any wrong valuation models that were used for finding the costs of debt and equity in the calculation of this number. You will, of course, need to calculate the CORRECT WACC as part of your answer.

Enzone Petroleum Corporation 275-113 Exhibit 1 Financial Summary, 19691975 1970 1969 Sales ($ millions) $2,260 Net income ($ millions) 193 Earnings per share 3.49 Dividends per share 1.60 Mean market price 60 Return on book equity 10% Beta (B) a. Estimated b. Closing price on July 13, 1975. 1971 $2,633 177 3.13 1.68 $2,473 176 3.11 1.68 56 9% 1972 $2,790 162 2.86 1.68 53 7% 1973 $3,346 227 4.00 1.68 76 10% 1974 $6,020 399 7.02 2.12 70 15% 1979 $6,100 292 5.12 2.30 361 10% .90 57 B% Exhibit 2 Information on U.S. Capital Markets, 1966-1975 1966 1967 1968 1969 1970 1973 1972 1973 1974 1975 5.2% 4.7 5.6% 5.0 6.2% 6.2 7.1% 8.1 7.9% 4.8 7.2% 3.7 7.1% 5.1 7.4% 7.4 8.6% 7.1 8.9% 5.2 Yields on newly issued Aa industrials 91-day treasury bills Estimate of the total return that investors expect to eam on a broadly diversified portfolio of common -10% -13% Enzone Petroleum Corporation 275-113 Exhibit 1 Financial Summary, 19691975 1970 1969 Sales ($ millions) $2,260 Net income ($ millions) 193 Earnings per share 3.49 Dividends per share 1.60 Mean market price 60 Return on book equity 10% Beta (B) a. Estimated b. Closing price on July 13, 1975. 1971 $2,633 177 3.13 1.68 $2,473 176 3.11 1.68 56 9% 1972 $2,790 162 2.86 1.68 53 7% 1973 $3,346 227 4.00 1.68 76 10% 1974 $6,020 399 7.02 2.12 70 15% 1979 $6,100 292 5.12 2.30 361 10% .90 57 B% Exhibit 2 Information on U.S. Capital Markets, 1966-1975 1966 1967 1968 1969 1970 1973 1972 1973 1974 1975 5.2% 4.7 5.6% 5.0 6.2% 6.2 7.1% 8.1 7.9% 4.8 7.2% 3.7 7.1% 5.1 7.4% 7.4 8.6% 7.1 8.9% 5.2 Yields on newly issued Aa industrials 91-day treasury bills Estimate of the total return that investors expect to eam on a broadly diversified portfolio of common -10% -13%