APPENDIX B: CAPITAL BUDGETING

BALANCE SHEET

Cash	2,000,000	Accounts Payable and Accruals	18,000,000
Accounts Receivable	28,000,000	Notes Payable	40,000,000
Inventories	42,000,000	Long-Term Debt	60,000,000
		Preferred Stock	10,000,000
Net Fixed Assets	133,000,000	Common Equity	77,000,000
Total Assets	205,000,000	Total Claims	205,000,000

Market Values of Capital

The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78.

You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost.

The company has 5 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D₀) was $.80. New stock could be sold with flotation costs, including market pressure, of 15 percent.

The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stocks beta is 1.22.

Your firm does not use notes payable for long-term financing.

Your firms federal + state marginal tax rate is 40%.

Question: What is the weighted average cost of capital for the firm. Do remember that management has a preference in using the market values of the firms capital structure and believes it current structure is optimal.