2. The management of Tarantulagoodies is considering a reduction in the corporations debt ratio. The following information is available: Debt: $10,000,000, kd=7.5%, tax-rate=30% Common Stock: $23,000,000, b=1.2, RF=3.5%, E(RM)=10%. The issuance of $5,000,000 in common stock and repurchase of debt in that same amount is expected to result in the reduction in kd to7%. The impact of the action on the cost of equity is to be determined. Should management pursue the change in debt ratio? Why/why not?

3.The next two questions are based on the following information:

You are to decide between two mutually exclusive projects. The first has an initial investment of $25 million, and FCFs of $10 million for the next 3 years. The second has an initial investment of $25 million and FCFs of $15 million in the first year, -$5 million in the second year, and $20 million in the third year. The cost of capital for either project is 9%.

Select between the two projects using: NPV and Profitability Index.

Select between the two projects using MIRR.