A firm has the following capital structure:

1. Bonds with market value of $2,000,000
2. Preferred Stock with a market value of $700,000
3. Common stock, of which 100,000 shares is outstanding. Presently, each common stock is selling at $20 per share

The preferred stock price per share is $40 and pays a $2

dividend. Common stock shares sell for $20 and pay a $2 dividend. Dividends for common stock are expected to grow by 1%. Bond price is $960, and the bond coupon rate is 5.5%. The bonds mature in 6 years.

The firms tax rate is 38%. The company has $2,000,000 in sales, and expenses of $1,100,000. The initial investment of $5,000,000 will be depreciated straight-line over 10 years. The project is expected to last 10 years.

1. What is the firms Weighted Average Cost of Capital (WACC)?

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2. What is the firms Operating Cash Flow (OCF)?

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3. Using the WACC is the NPV, using the WACC (use the answer from question 1 above), and OCF (use the answer from question 2 above)?

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4. Based on your answer to question #3, would you accept or reject the project? Explain why?

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