ABC Company has a target Debt Ratio of 60%. ABC has a debt issue outstanding that is currently trading at 105% of its par value of $1,000. The outstanding issue pays annual interest payments, has a coupon rate of 8.2%, and 7 years remaining until maturity; new debt with a 30-year original maturity will incur an 5% flotation cost. Further, ABC's common stock trades currently at a price of $36.45 and the market expects ABC to pay a dividend in one year of $3.80 (ABC just paid a dividend of $3.42, and this growth rate is expected to continue); ABC pays out all net income as dividends; and new equity will incur a 12% flotation cost. ABCs tax rate is 32%.

1. What is the YTM on ABCs existing debt?

2. What is ABC's before tax cost of debt?

3. What is ABC's after-tax cost of debt?

4. What is ABCs expected future growth rate?

5. What is ABC's cost of internal equity?

6. What is ABCs cost of external equity?

7. What is ABC's WACC with internal equity?

h. What is ABCs WACC with external equity?

ABC (from above) is currently evaluating two mutually exclusive projects. Project A has a time 0 equipment cost of $280,000 and is expected to return cash flows of $75,000 per year for the next 14 years. Project B has a time 0 equipment cost of $1,056,000 and is expected to return cash flows of $245,000 per year for the next 14 years.

1. What is the IRR for project A?

2. What is the IRR for project B?

3. What is the NPV for project A?

4. What is the NPV for project B?

5. Which project should ABC adopt?

6. Why?