1.Beta Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity.Beta is in the 40% tax bracket.The company can issue up to $20,000,000 in new bonds at par with a 7% coupon rate; any subsequent amount must carry a 2% premium to compensate investors for the added risk.A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost.The firm has $21,000,000 in retained earnings for the current period.Beta's common stock trades at $40.00 per share and the expected dividend on the common stock at t₁is 2.00.Flotation costs on a new common stock issue is $5.00 per share.The company is growing at 7% per year.

A) What is the cost of preferred stock?

B)What is the cost of internal common equity?

C)What is the cost of equity from new common stock?

D) What is the after-tax cost of debt?

E)What is the debt breakpoint in the marginal cost of capital (MCC) schedule?

F)What is the equity breakpoint in the marginal cost of capital (MCC) schedule?

G) What is the WACC, if the firm DOES NOT issue new common stock?

2.You are given the following four independent projects:

Project A Project B Project C Project D

Initial outlays -50,000 -100,000 -450,000 -175,000

Cash Flows

Year 1 10,000 125,000 200,000 50,000

Year 2 15,000 25,000 200,000 50,000

Year 3 20,000 25,000 200,000 50,000

Year 4 25,000 25,000 0 50,000

Year 5 30,000 0 0 0

"Showing your work" for problems such as these means show the TVM and/or cash flow inputs. If you prefer to work this in Excel, submit the excel worksheet, which must include the equations in the appropriate cells so I can follow your work. Simply typing the answer into a cell in Excel is not enough for credit. If in doubt, check out the solutions to the Capital Budgeting homework in Junction Education. I have worked out the problems, "showing my work".

A)Calculate the Pay Back Period of each project.

B)Calculate the NPV of each project at 10% cost of capital.

C)Calculate the PI of each project at 10% cost of capital.

D)Calculate the IRR of each project.

E)If you have a constraint to recover the initial investment amount within two years, which project(s) would you choose?

F)If your WACC is 18%, which independent project(s) would you accept?

G)If your WACC is 10% and the firm uses NPV as its preferred decision tool, which of these independent project(s) will you accept?