5. (25 points) Company ASDF has 10 million of common shares outstanding, traded at $70 per share. Market beta of those shares is 0.8 . Expected market return is 6% and risk-free rate is 1%. The company also has 1 million of preferred stocks outstanding. Each stock is traded at $105 and pays an annual dividend of $8. It also has two bond issues outstanding. Bond A matures in 10 years, has face value of $1,000 and coupon rate of 10% (coupons are paid annually). Current market price of bond A is $1,200. Bond B is a zero-coupon bond, with face value of $1,000. It matures in 5 years and is currently traded at 80% of par. There are 100,000 bonds of type A and 20,000 bonds of type B issued. Tax rate is 15%. (a) (10 points) What is capital structure of the company (that is, what are weights of equity and debt in the company's total value)? 2 (b) (15 points) Suppose that ASDF plans to expand its operations by launching a 5-year project that has a risk profile common to existing ASDF's projects. It is also not going to change ASDF's capital structure. This project requires an initial capital investment of $2,000,000. Every year of its operation, the project is going to generate EBIT of $300,000. Fixed assets are going to be depreciated to zero using a straight line rule; their market value at the end of year 5 is zero. There will be no adjustments in net working capital. Should ASDF take this project