Ingenuity Corporation has been quite successful since its inception three years ago. It is now poised to enter high growth supported by several strong project opportunities which the company needs to fund. It must now decide how to fund the projects. The corporate finance department has been charged with evaluating project returns and recommending the best capital structure to fund them. Ingenuity Corp. plans to pursue all three projects being evaluated. Using the information below, utilize learnings from Units 3 and 4 to help Ingenuity evaluate the returns for each project and determine the best capital structure to support its high growth plans.

Key Facts:

Year

0 1 2 3 4 5

Proj. 1

(30,000) 8,000 8,000 10,000 10,000 5,000

Proj. 2

(30,000) 500 20,000 10,000 10,000 2,000

Proj. 3

(20,000) 3,000 5,000 12,000 12,000

-

Cash Flows

(dollars in millions)

There are no terminal values for the projects

Current debt is $100 million (at 7%) and current equity is $300 million.

The treasury rate is 4%, AAA rated bonds are trading at 7%, the company tax rate is 35%, and current levered beta is 1.40.

The company will either fund the projects completely through debt (new bonds at 10% interest), completely through equity (new stock issuance), or will fund half through debt (new bonds at 10% interest) and half through new stock issuance.

If the company funds 100% through debt, the new levered beta will be 1.35. If it chooses to fund 100% through equity, the new levered beta will be 1.15, and if it funds 50% through debt and 50% through equity, the new levered beta will be 1.25.

Required:

Please submit a spreadsheet with the following items:

Determine Ingenuity's current WACC and its potential WACC under each the three funding scenarios.

Calculate and prepare table showing the NPV, IRR, and Payback metrics for each of the projects utilizing the company WACC for funding scenario.

Which funding option should the corporate finance department recommend? Why?