1. The Graf company needs to finance some new R&D program, so it will sell new bonds for this purpose . Graafs currently outstanding bonds have a $1,000 par value, a 10 percent coupon rate, and pay interest semi-annually . The outstanding bonds have 25 years remaining to maturity , are callable after 5 years at a price of $1,090, and currently sell at a price of $700. The yield curve is expected to remain flat. On the basis of these data, what is the best estimate of Graafs nominal interest rate on the new bonds it plans to sell ?

2. Assume that as investment manager of Maine Electric companys pension plan ( which is exempt from income taxes ), you must choose between Exxon Mobile bonds and GM preferred stock . The bonds have a $1,000 par value: they mature in 20 years: they pay $35 each 6 month : they are callable at Exxon Mobiles option at a price of $1,150 after 5 years ( ten 6 month periods): and they sell at a of $815.98 per bond. The preferred stock is a perpetuity : it pays a dividend of $1.50 each quarter, and it sells for $75 per share . Assume interest rates do not change . what is the most likely effective annual rate of return ( EAR) on the higher yielding security ?

3. Sunrise Canoes Inc. has determined that its optimal capital structure consists of 55% equity and 45% debt. Sunrise must raise additional capital to fund its upcoming expansion. The firm has $0.5 million in retained earning that has a cost of 11%. Its investment bankers have informed the company that it can issue an additional $3 million of new common stock at a cost of 14% . furthermore , the firm can raise up to $1.5 million of a debt at 10% and an additional $2million at 12%. The firm has estimated that the proposed expansion will require an investment of $2.6 million . what is the weighted average cost of capital for the funds Sunrise will be raising ?

4. The director of capital budgeting for Giant Inc. has identified two mutually exclusive projects, L and S, with the flowing expected net cash flows:

	Expected Net Cash Flows	Expected Net Cash Flows
Year	Project L	Project S
0	($100)	($100)
1	10	70
2	60	50
3	80	20

Both projects have a cost of capital of 10 percent

What is the payback period for project S?