Gizmo Inc has outstanding 5 year bonds with a 12% coupon rate, annual payments selling for $1,300. Its preferred stock is selling for $150 and pays a fixed dividend of $12. Gizmo Inc. common stock is selling for $200 and has a beta of 1. The risk-free rate is 5% and the expected return on the market is 12%. The target Capital structure calls for 40% debt, 20% Preferred Stock, and 40% Common Equity.

Gizmo Inc. is considering the purchase of a new machine for 200,000. It will be depreciated using the MACRS 3-year class life [33%, 45%, 15% and 7%] and can be used for three years at which time it will have a market value of $30,000. Purchase of the new machine will cause an increase in net operating working capital by $10,000. Sales are expected to increase by $100,000 per year. The new machine will be depreciated using the MACRS 3-year class life.

The firm has a marginal tax rate of 40%.

What is the before-tax cost of debt?

What is the cost of preferred stock?

What is the cost of common equity?

What is the weighted average cost of capital?

What is the depreciation expense for year 1?

What is the depreciation expense for year 2?

What is the depreciation expense for year 3?

What is the after-tax cash flow from the sale of the machine at the end of the third year?

What is the Free Cash Flow for year 0?

What is the Free Cash Flow for year 1?

What is the Free Cash Flow for year 2?

What is the Free Cash Flow for year 3?