Integrative Capital Budgeting Problem Your corporation has the following balance sheet. Security Book Price per Units Coupon

Class Value Share Outstanding Rate Maturity Bonds $50 mm $1000 50,000 7% 10 yrs.

Debentures $30 mm $950 30,000 8% 20 yrs.

Preferred Stock $40 mm $90 400,000 12%

Common Stock $50 mm $50 4,000,000

Retained Earnings $75 mm Assume that the beta of the common stock is 1.75, the risk free rate is 4% and the market premium (i.e., E(Rm) R f) is 9%. Assume a tax rate of 40%, the par value of debt securities is $1,000 and the par value of preferred stock is $100. 1. Determine the ATWACOC. 2. The firm in is considering purchasing new equipment. The initial investment is $5 million. The equipment will increase cash flows for one of the divisions of the firm by 10% each year until year 10. In year 1, the cash flow is $10 million. Assume that after year 10, the cash flow will decline back to $10 million unless a new investment is made. Calculate the NPV and the IRR of the project. Should the firm make the investment? Why or why not? 3. What is the profitability index (PI) of the project? 4. What is the payback for this project? 5. What is the discounted payback for this project?