(For this part, you MUST present sufficient solution steps, and MUST apply specific Excel functions =NPV(), =IRR(), =AVERAGE(), =YIELD()

Case Two (22 pts)

Given the following information for Bajor Co.:

Debt: Bajors long-term debt capital consists of bonds with 6.250 percent coupon rate (semiannual coupon payments), 9 years time-to-maturity, and current price of 106.61 percent of its par value (i.e., price = 106.61 relative to full amount redemption par of 100).

Preferred stock: Bajor has not issued any preferred stocks.

Common stock (equity):

• Bajors equity capital consists of common stocks with the most recent annual dividend of $0.92 per share, and a current stock price of $14 per share.

• According to online data sources, Bajors long-term dividend growth (for next 5-Year average, per annum) g = 4.5% per year.

• The risk-free Treasury bill return is 3.8%; the market expected return for the stock market on average is 12.3%; and Bajors systematic risk (Beta) is 0.71.

Taxes: The applicable federal-plus-state corporate tax rate for Bajor is 25.7 percent.

Capital weight: Bajors Market Cap amounts to $18.23 billion, and Total Debt amounts to $14.44 billion. You can use such data to estimate the capital weights for equity and debt, respectively (We and Wd).

Time constraint: For any investment projects, Bajor are required by her investors to recover its initial cost within no more than 6 years.

Q1: What is Bajors pretax cost of debt Rd, cost of equity Re, and WACC, respectively? (Hint: For the best estimate of cost of equity Re, you must apply both CAPM and Dividend Growth Model and then average the two estimates.)

Q2: There are three investment projects available to Bajor:

Project A costs $12 million to invest today, and then provides cash inflow from assets of $2.50 million per year for the next 7 years.

Project B costs $18 million to invest today, and then provides cash inflow from assets of $3.30 million per year for the next 8 years.

Project C costs $30 million to invest today, and then provides cash inflow from assets of $4.25 million per year for the next 10 years.

If Projects A, B & C are mutually exclusive, which project(s) should Bajor accept? (You must apply the three major investment evaluation rules NPV, IRR and Payback)

Q3: If Projects A, B & C are independent, which project(s) should Bajor accept? (You must apply the three major investment evaluation rules NPV, IRR and Payback)