In financing its $180M project, Lee Corp. (i) issues $20M par value of preferred stocks,

(ii) $70M par value of long-term debt, and (iii) finances the remaining portion of the project with common stocks that have a discount rate of 15%.

Its 18-year 8% coupon bonds, which pay coupons twice annually, are priced at 96% of the par value. Its preferred stocks have a 7.2% annual dividend rate on a par value of $100 and are priced at $104 per share.

1. Compute the current yield and the capital gain yield of the discount/par/premium (circle correct choice) bond issued by Lee Corp. Based on the information about the bond, state TWO different properties that support your choice of the bond type.
2. Compute the weighted average cost of capital (WACC), which is based on the market values (not their book values) of financial securities issued, for Lee Corp. that has a tax rate of 21%.
3. The flotation costs for raising new debt capital, preferred stock capital and equity capital are, respectively, 3%, 6% and 14%. Besides, this $180M project generates an unadjusted NPV of $11.5M. Assume that two-fifth of common equity capital is financed with retained earnings, compute the weighted average flotation cost and the adjusted NPV of this project after taking into account of flotation costs. Explain precisely whether the flotation cost adjustment impacts the decision on the project.