1. Calculate the marginal weighted average cost of capital for FPC, Inc.

The following points are known to be true:

1. The firm's capital structure was considered optimal. 2. The firm's stock price, its capital structure and its component costs of capital are interrelated. 3. Both the component costs of capital and the weighted average cost of capital increase as debt is added to (or subtracted from) the firm's capital structure. 4. The optimum capital structure provides the minimum cost of capital and the maximum stock price. 6. Setting the firms capital structure required judgment concerning several items, particularly the firms projected cash flow, industry practice, and likely changes to the firms core business. 7. The firm is in the 30% (combined) tax bracket.

Balance Sheet ($000's)--December 31,2001

Current Assets	$1,500	Current Liabilities	$400
Fixed Assets	1,500	Long Term Debt	600
		Common Stock ($1 per)	400
		Retained Earnings	1,600
Total Assets	$3,000	Total	$3000

Exhibit 2

Selected Capital Market, Company, Industry Data

• FPC, Inc. may issue long-term debt at par, with a coupon rate of 5 percent; its existing $1,000 par bonds carried a coupon rate of 7% (see FPC, Inc. A).

• The firms stock price had risen to $21.50 in recent weeks, and the increase in the firms net income after-tax is 16%.

• A broad market average of common stocks had risen at an annualized rate of 15 percent in recent weeks. The return on that average is now 16%. (The yield on 10-year U.S.Government bonds is 5.01%. The stock of FPC, Inc. was 10 percent more volatile that the market average of stocks.)

• Many specialized consulting firms, if they experienced substantial net income growth, have a long-term debt to total asset ratio of approximately 40 percent on average.