Firm XYZ had the following data:

Common stock: 2m shares outstanding @ $40/share. The cost of equity capital is 8.6%.

Debt: 80,000 bonds outstanding at a market value of $1000/bond with a 4% coupon rate. (They are trading at par.)

The tax rate is T=25%.

11. The firms capital structure is 50% debt and 50% equity. True False

12. The before tax cost of debt is 4% (market rate of interest) because the bond is trading at par. True False

13. The firms WACC is a. 8.6% b. 5.8% c. 2% d. 6.3% e. not enough information to tell

14. Say that WACC = 5.8%. A project with an internal rate of return (IRR) equal to 5% should be rejected. Note: The project has the same risk as the firm. True False