Mannheim Biotechnology Limited is expanding the business by considering investing in some profitable projects. Stevenson, a project manager of Mannheim was asked to estimate the cost of capital and evaluate the following projects:

Table 1: Projected Cash Flows (in millions)

year	0	1	2	3	4
Project A	100	10.00	50.00	40.00	20.00
Project B	200	80.00	90.00	85.00	10.00
Project C	300	105.00	90.00	110.00	20.00

Table 1: Projected Cash Flows (in millions)

Albert, the Chief Financial Officer (CFO) of Mannheim has provided him some relevant information.

1. The current bond price of Mannheims 10% coupon, semiannual payment with 10 years left to maturity is $1,134.20. The par value of the bond is $1,000. The companys tax rate is 40%.
2. The current price of the preferred stock is $31.25 with annual dividend payment of $3.75.
3. Mannheims common stock is currently selling for $45 per share. Its last dividend payment was $3.25 and dividend is expected to grow at a constant rate of 3% in the foreseeable future. Mannheims beta is 1.2, the risk free rate is 6%, and the market risk premium is estimated to be 4%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4% with the yield on the Treasury bond of 6.5%.

Sharron, a finance manager of Mannheim, has $400 million capital available consisting of $160 million debt, $140 preferred stock, and $100 million common stock.

Albert asked Stevenson to prepare a report answering the following questions:

1. Calculate the Net Present Value (NPV), Discounted Payback Period (DPP) and Modified Internal Rate of Return (MIRR) for Project A, B, and C.
2. What is the estimated cost of common equity using the DCF approach? What is the bond-yield-plus-risk-premium estimate for Mannheims cost of common equity?
3. What is your final estimate for r_s or the average required rate of return?
4. Explain in words why new common stock has a higher cost than retained earnings.
5. Mannheim estimates that if it issues new common stock, the flotation cost will be 20%. Mannheim incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?