1.You are in charge of one division of a company. Your division is subject to capital rationing. Your division has 4 indivisible projects available, detailed as follows:

Project Initial Outlay IRR

1 $2m 18%

2 $1m 15%

3 $1m 10%

4 $3m 9%

If you must select projects to a budget constraint of $5m, which set of projects should be accepted so as to maximize firm value?

2. A public company has the following balance sheet ($000s)

Cash $540

Accounts Receivable $4,580

Inventories $7,400

Long Term Debt $12,590

Net Fixed Assets $18,955

Common Equity $18,885

Total Assets $31,475

Total debt & Equity $31,475

At present, the firms common stock is selling for a price equal to its book value, and the forms bonds are selling at par. The market requires a 15% return on the common stock, the firms bonds command a yield to maturity of 8% and the firm faces a tax rate of 34%. What is the firms weighted average cost of capital?