Account

$ Costs before tax

Long-term Debt 1,500,000 10%

Preferred Stock 500,000 12%

Common Stock 3,000,000 20%

1.Calculate the weighted average cost of capital (tax is 40%)

2.Using the same cash flows in exhibit I find the NPV, PI, IRR and MIRR (Use your answer on part one as cost of capital). Which project(s) would you recommend and why?

Part III

Based on the following information and data in part II prepare Performa Income Statement. Also, calculate the DOL, DFL and DTL and earring per share.

Q = 20, 000 units

Price = $120

VC= $80

Fixed cost = $450,000

100,000 outstanding shares

Assume that the management has a target DTL of 6. How much debt needs to be retired (replace by common stocks if any) in order to achieve that goal? What would be the new WACC?