1. What are the two components of total risk? Explain each component. Why is 2. Under what circumstances would it be appropriate for a firm to use different costs some risk diversifiable? Why is some risk non-diversifiable? of capital for its different operating divisions? If the overall firm WACC were used as the discount rate for all divisions, would riskier divisions or the more conservative divisions tend to get most of the investment projects? Describe the information Net Present Value provides about a sequence of cash flows. What does it tell a firm about the value of a potential project? What is the NPV criterion decision rule? 3. Section 2 - Answer the following question (25 points) All work must be shown to receive full credit 4. You are given the following information concerning Parrothead Enterprises: Debt: 10,000 6.9 percent coupon bonds outstanding, with 15 years to maturity currently selling for 104 percent of par. These bonds pay interest semiannually. (YTM is 6.48%) Common Stock: 275,000 shares of common stock selling for S68.50 per share. The stock has a beta of .85 and will pay a dividend of $3.25 next year. The dividend is expected to grow by 5 percent per year indefinitely. Preferred Stock: 8,000 shares of preferred stock selling at $94 per share paying a dividend of $4.90 Market: 12 percent expected return, risk-free rate of 3.5 percent, and a 35 percent tax rate. a. What is the firm's market value capital structure? (5 points) b. What is the firm's cost of equity? (5 points) c. What is the firm's cost of debt? (5 points) d. What is the firm's cost of preferred stock? (5 points) e. What is the firm's weight average cost of capital? (5 points)