Genesis Therapeutics, Inc. is estimating the firms cost of capital for capital budgeting purposes, using the cost of capital component information they have gathered. Genesis long- term debt consists of 8.5% coupon, semi-annual payment bonds with 15 years remaining to maturity. The bonds last traded at a price of $984.80 per $1,000 par value bond. New bonds can be issued at a flotation cost of 3.5% on the proceeds. Genesis tax rate is 21%. The companys perpetual preferred stock pays a dividend of $10 per year. It trades in the market at a current price of $109.65 per share. A flotation cost of 4% will be required on a new issue of preferred stock. The firms last annual dividend on common stock was $10.88 per share, and the dividends are expected to grow at about 8% into the foreseeable future. Genesis stock sells at a price of $125 per share in the market. The yield on 30 year T-bonds is 5.4% and the market risk premium is around 6.25%. The firms beta is 2.0. New issues of common stock would involve flotation costs of around 5.05% of proceeds. Genesis historically retains about $2.7 million as retained earnings each year, and they expect this situation to continue into the near future. Target capital structure for the industry is 30% debt, 10% preferred stock, and 60% common stock. a) Compute Genesis before- and after-tax cost of debt. b) ComputeGenesiscostofpreferredstock. c) Compute Genesis average cost of internal equity using the DCF and CAPM methods. d) ComputeGenesisaveragecostofexternalequity. e) Compute Genesis retained earnings breakpoint. f) Compute Genesis WACC1 (using internal equity as the equity component) and WACC2 (using external equity as the equity component).

Genesis also is presented with the following investment opportunity set of independent projects with normal cash flows. These projects are discretionary investments. Project Therapy P Therapy Q Therapy R Capital Investment Outlay Required $2.6 million $2.2 million $3.0 million Projects IRR 15.0% 14.2% 13.8% Using the weighted average cost of capital schedule computed above, please identify the optimal capital budget for Genesis which Therapies should Genesis invest from this set? In addition to the discretionary investment therapies, Genesis Inc. is also evaluating two mutually exclusive, essential disinfection protocols for the ventilation system in their cancer therapy center. The firm uses a discount rate of 15% for all their essential projects. Year 0 1 2 3 Protocol-D1 - 300,000 485,000 - 150,000 - 14,000 Protocol-D2 - 200,000 300,000 - 300,000 250,000 a) Using the NPV evaluation criterion, which protocol should Genesis select? Why? b) Using the IRR evaluation criterion, which protocol would Genesis Inc. rank higher? Why? Overall, which protocol should Genesis Inc. select using the NPV and IRR methods?