1.John Kay Inc. is considering the installation of a new production line to make automated flying shuttles for weaving machines. The capital cost of the equipment is $2,100,000. The machines on the new line are classified as 15-year property. Kay plans to operate the line for two years, at which time the project will end and the assets will be disposed of for $1,000,000. The new line requires an increase in net working capital of $20,000, which would be liquidated at the end of the project. The investment outlays would occur immediately. Sales are expected to be constant at $2,000,000, and operating expenses at $800,000. Assume that all revenues and operating expenses are received (paid) at the end of each of the two years of operations. Kay's marginal tax rate is 35 percent. Kay's cost of capital is 11%. What is initial cash flow for the flying shuttle project? MACRS Depreciation Rates

Year	10-Year	15-Year
1	10.00%	5.00%
2	18.00%	9.50%
3	14.40%	8.55%

2.

As a newly hired financial analyst, your first job at JKL Inc. is to calculate the company's cost of capital. The present capital structure, which is considered optimal, is as follows:

	Market Value
Debt	$40 million
Preferred Stock	$5 million
Common Equity	$55 million
Total Capital	$100 million

If JKL Inc. issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an annual dividend of 8% (the next dividend is due in one year). Common equity has a beta of 1.20, the market risk premium is 5%, and the risk-free rate is 3%. If the firm's tax rate is 40%, what is the weighted average cost of capital? Round answers to the nearest tenth of a percentage.