1.Suppose the Mitchell Company has a stock price of $20 per share and there are 3,000, 000 shares outstanding. Further, suppose its outstanding debt has a face value of $12,500,000 and is currently selling at a price of 120% with a yield of 5%. The risk free rate currently is 1.5% and Mitchell's equity cost of capital is 8%. Further, the Mitchell Company is a profitable firm that pays a corporate tax rate of 40%.

Mitchell Company is considering a project that would require an inunediate expenditure of $1,000,000 for equipment to expand its current business activities. This equipment would have a 5 year life with no impact on net working capital and the equipment will have zero salvage value and zero disposal cost. Further, the equipment will be depreciated via the straight line depreciation method. Prior to considering depreciation expense and tax effects, the equipment itself will be responsible for generating additional gross profits of $250,000 annually for each of the 5 years of its useful life.

Should the Mitchell Company make the purchase? Be sure to show your work and clearly put forth your thought process.

[1.00 points)

2. The Dye Company is a privately held company that has no debt at this time.

Currently the owner of the company, Renee Dye, believes the company has a 7.5% firm cost of capital. Renee is thinking about going from being a 100% equity financed firm to one that has some debt. Therefore, she would like you to estimate the impact taking on debt in the future would have, holding all else equal, on her current 7.5% firm cost of capital.

Dye Company is a profitable firm that pays a 30% tax rate. Further, it is conunon knowledge accepted by Renee and you that the current risk free rate is 1.5% and the market risk premium is 4%.

.Based upon the information given here and your belief in the CAPM, what is the current equity beta for Dye Company?

(0.50 points)

.If Renee moves from zero debt to a D/V level of 20%, what would you estimate to be the company's equity beta?

(0.50 points]

.With that move to a D/V level of 20%, what would be the company's equity cost of capital?

[0.50 points]

.If when the Dye Company takes on debt, it has a debt cost of capital of 5%, what would you estimate the firm's overall cost of capital to be?