3. The following five parts are all based on the status quo of company BW.

(1) Company BW has issued 5,000 corporate bonds with a maturity value of $1,000 and a coupon rate of 8%. Coupon payments are made every 6 months and those bonds will mature in half a year from today. Current market price of those bonds is $986.

Marginal corporate income tax rate is 20%, find the annual after-tax effective cost of debt. [5 points]

(2) Company BW has borrowed $2,500,000 from a bank. The nominal interest rate is 7% and BW is making monthly payment.

Find the annual effective cost of bank loan. [4 points]

(3) Company BW has 100,000 shares outstanding and the market price is $22 per share. BW has been making semiannual dividend payments and last payment was $0.21 per share. What is BWs annual effective cost of equity if investors think dividend payments in the future will increase by 9%? [5 points]

(4) Find the overall (annual) cost of capital for BW (WACC), based on questions 3.13.3. [10 points]

(5) Company BW has the following two investment opportunities (A and B). Which project is better, according to MIRR? [10 points] Which project is better, according to Discounted Payback period? [10 points]

Net Cash Flows End of Year Project A Project B 0 -4,000 -5,500 1 1,500 3,500 2 3,000 2,800 3 2,500 1,900