Gran Matter, Inc. is planning its 2015 capital budget and needs your advice. The firm believes that the capital relations shown below are optimal and will be maintained.

Debt	$480,000,000
Preferred stock	240,000,000
Common Equity	480,000,000
Total Claims	1,200,000,000

The firm has a marginal tax rate of 30% and has $24,000,000 of retained earnings available for investment this year. On June 26, 2010 Gran Matter paid a dividend of $7.626 on its common stock. Yesterday (June 26, 2014) it paid a dividend of $11.165. The stock is currently selling for $100 a share. Assume that this growth rate continues indefinitely. The firm can raise funds under these conditions:

BONDS: Up to $20,000,000 in new bonds can be sold at a before tax cost of 15%. Beyond $20,000,000 the before tax cost jumps to 18%.

PREFERRED STOCK: Up to $10,000,000 in $50 par preferred stock with a dividend rate of 16% can be sold at $45 a share with flotation costs of $5.00. Beyond $10,000,000 the flotation costs rise to $8.64 a share.

COMMON STOCK: Up to $8,000,000 in new common stock can be sold with underpricing and flotation costs of $18.13 per share. Beyond $8,000,000 the underpricing and flotation costs total $31.78.

The firm is considering five potential projects with the following forecasted cash flows:

Project	Outlay	Annual CFs	Life in Years	IRR
A	10,000,000	3,197,778	5	18.0
J	20,000,000	6,984,119	5	22.0
P	20,000,000	7,134,008	5	23.0
R	15,000,000	5,015,695	5	20.0
Z	15,000,000	4,634,687	5	16.5

{a} Compute Gran Matters marginal cost of capital for each segment of the marginal cost schedule.

{b} Clearly demonstrate using a CLEARLY LABELED graph which projects are acceptable and compute the average cost of capital for the capital budget you are advocating.

{c} Calculate the yield to the investor for the first block of preferred stock?

{d} Compute the net-present value of Project A. Clearly indicate what discount rate you are using.

{e} Why is Gran Matter accepting a project whose IRR is less than the rate of return required by shareholders require? Even if you did not get this result, explain how it is possible.