CASE 1 (25 points)

The following information is available for Sunny Corporation:

Debt: 10,000 bonds outstanding that are selling for 98 percent of par. Bonds with similar characteristics are yielding 6.2 percent, pretax. The bond par value is 1,000.

Common stock: 35,000 shares outstanding, selling for 63 per share; the beta is 1.15. Preferred stock: 4,000 shares of 6 percent preferred stock outstanding with a par value of 100 per share, currently selling for 52 per share. Market: 6.7 percent market risk premium and 3.2 percent risk-free rate. Assume the companys tax rate is 25 percent. Instructions: 1. Calculate the firms market value capital structure. (5 points) 2. Calculate the firms costs of common equity, preferred stock and debt. (5 points) 3. Calculate the weighted average cost of capital (WACC). (5 points) 4. If a firm is presented with an average risk project with an internal rate of return of 15%, should it accept the project? Explain. (5 points) 6. Which is more relevant: the pretax or the after-tax cost of debt? the book or market value weights? Explain. (5 points)