Here is a book balance sheet for Parker Associates. Figures are in millions.

Assets Liabilities and Shareholders Equity

Assets (book value) $100 Debt $40

Equity $60

___ ___

$100 $100

Unfortunately, the company has fallen on hard times. The 6 million shares are trading for only $5 apiece, and the market value of its debt securities is 50% below the face (book) value. Suppose shareholders now demand a 25% expected rate of return. The bonds are now yielding 15%.

1. What is the firms weighted-average cost of capital if the firms tax rate is 34%?
2. If the company considers a normal project whose risk is about the same as the companys risk with an internal rate of return of 17%, should it accept the project? Why or why not?