Lee Corp. uses the following sources of capital to finance its investment project:

DEBT: 140,000 units of 15-year 9% coupon bonds that are currently selling at the

price quote of 105 apiece. In addition, 50,000 units of 10-year 6% coupon bonds that are priced at 78 apiece. Both bonds pay coupons semi-annually!

COMMON STOCK: 5,000,000 shares of common stock that is priced at $51.0 per share. Lee Corp. just paid $4.20 annual dividends per share, which is expected to grow annually at 7% indefinitely.

• A) Compute the weighted average cost of capital (WACC) for Lee Corp., given that the marginal tax rate is 35% and the book value of equity is $150M. Assume that all securities are fairly priced!

(b) Say, the flotation costs for issuing new debt and common stock are, respectively, 4% and 18%. Without accounting for flotation costs, the initial outlay and NPV of the project are estimated to be $435M and $55M, respectively. Compute the weighted average flotation cost, and the NPV of this project after taking into account of the flotation costs.