CASE 1 (20 points) The total book value of the firms equity is 20 million, and book value per share is 40. The stock has a market- to-book ratio of 2.0. The firms bonds have a face value of 10 million and sell at a price of 98% of face value. The yield to maturity on the bonds is 8%. The common stock has a beta of 1.15. The Treasury bill rate is 3%, and the market return is estimated at 10%. The firms tax rate is 35%.

Instructions:

1.Find the firms WACC. (15 points)

2.The firm is considering two independent projects with an average level of risk. Internal rate of return of Project 1 is 8%. Internal rate of return of Project 2 is 9%. Advise the company whether it should accept or reject these projects. (5 points)