Assume that you are the CFO of Microsoft Company and you were asked to estimate the cost of capital. Microsoft has 1500 bonds that now has 20 years to maturity and a 7.00% annual coupon. The bond currently sells for $925 and the companys tax rate is 30%. Moreover, Microsoft has 60,000 common stock ($10 par value) and the risk premium over its own debt cost is 5.00% and the the yield on a Treasury bond is 4%.

The company recently decided that its target capital structure should have 35% debt, with the balance being common equity.

Furthermore, the CEO identified two investments opportunities. Project A will cost $50,000 and Project B will cost $90,000. The CEO has decided that it will invest in one project but not both. The expected cash flow that will be generated by both project are listed below: