AAA Health, Inc. $($NYSE: A$3$H$)$ is evaluating a new product, a vitamin C$/$fish oil blended energy drink. As an assistant director of the capital budgeting division of AAA Health, you are responsible for the evaluation of the proposed project. You collected the following information about the project and the cost of capital. You should make an accept$/$reject recommendation to the director of your division based on your evaluation.

Information about the Proposed Project

Initial investment and depreciation: The new drink would be produced in an unused building $($owned by AAA Health$),$ which is fully depreciated. The new equipment required for the project would cost $$500,000,$ plus an additional $$50,000$ for shipping and installation. With the new project, inventories would rise by $$60,000,$ and accounts payable would increase by $$10,000.$ All of these costs would be incurred at $t=0.$ The machinery will be depreciated under the Modified Accelerated Cost Recovery System $($MACRS$)$ as $3-$year property. The depreciation rates are $33\%$ at $t=1,45\%$ at $t=2,15\%$ at $t=3,$ and $7\%$ at $t=4.$

Project life and salvage value: AAA Health expects to run the project for four years. The cash inflows are assumed to begin one year after the project is undertaken, or at $t=1,$ and to continue to $t=4.$ At the end of the project's life

Sales and operating costs: unit sales are expected to total $50,000$ bottles per year, and the expected sale price is $$10$ per bottle. Cash operating expenses for the project $($total operating cost excluding depreciation$)$ are expected to amount to $40\%$ of sales revenue.

Tax rate: AAA's marginal tax rate is $30$ percent.

Information for cost of capital estimation

AAA Health has outstanding bonds with a $6\%$ annual coupon rate $10$ years remaining until maturity and a face value of $$1000.$ The bonds make semiannual coupon payments and are currently trading in the market at a price of $$864\mathrm{.}10.$

A$3$H can issue preferred stock with an offering price of $$25$ per share and annual per share dividend of $$2\mathrm{.}40.$ Flotation costs are equal to $4\%$ of the gross proceeds.

$10$ year treasury bond yield is equal to $5\mathrm{.}52\%.$The market risk premium is $5\%.$The beta of A$3$H is $1\mathrm{.}6$

The target weight of capital: $40\%$ debt $10\%$ preferred stock and $50\%$ common equity

A$3$H can undertake a New project without issuing new shares of common stock if the required initial investment does not exceed $$600,000.$ If the initial investment is greater than $$600,000$ the firm should sell new common stock.

Questions

Part I. WACC Estimation $(2$ points each$)$

Estimate the cost of debt before$-$tax.

Estimate the cost of debt after$-$tax.

Estimate the cost of preferred stock.

Estimate the cost of common equity.

Estimate the WACC.