17.16 Stratford Textile Corporation (STC) has decided to relocate to North Carolina in four years. Because of transportation costs and a nonexistent secondary market for used tex tile machines, all of STC's machines will be worthless after four years. Mr. Rayon, a plant engineer, recommends that one of the following two machines should be pur- chased for use in the existing plant over the next four years: Heavy-Duty Light-Weight Model Model Expected annual cost savings$640 Economic life Price of machine 4 years $1,000 $616 years $500 The machines carry a CCA rate of 20 percent. STC is subject to a corporate tax rate of 40 percent. STC obtained the following information for its analysis of various invest ments and financial proposals: Expected Return Vaince Market Return Covariance with sset Risk-free asset Market portfolio STC common stock 0.2 0.04 0048 STC, an all-equity firm, has a market value of $10 million. a. What is STC's cost of capital? b. Which of the two machines should STC purchase? c. The CFO of STC is considering the sale of $2 million of 10 percent perpetual bonds and using the proceeds to repurchase STC stock. If this plan is adopted 1. What is the new value of the firm? 2. What is the value of the firm's equity? d. Suppose that, because of the new debt, the firm will face costs associated with possi- ble financial distress. These costs can be expressed as 2 value calculated in (c). Do these costs imply that STC should remain unlevered? percent of the levered firm