Miramar Corporation has 60,000 shares of common stock outstanding at a market price of 24 per share. The firm has also 4,000 bonds outstanding, paying a 3.5% annual coupon rate, with a face valueof 1,000 each, and currently selling at 96 percent of par. Bonds with similar characteristics are yielding 4.5 percent (pretax cost of debt). The stock beta of the company is 1.25 and the market risk premium is 7.2%. The Treasury-bill rate of return is 4.5% (risk-free rate). The marginal tax rate of company is 33%

Instructions:

1) Estimate the cost of equity of Miramar Corporation. (10 points)

2) Calculate the weighted average cost of capital of Miramar Corporation. (10 points)

3) Assuming that no new financing will be issued for undertaking these projects and that the mix of debt and equity will remain the same than in the overall firm, compute the specific WACC of each project. (15 points)

4) Determine which project should be accepted/rejected by the firms management. Briefly justify. (10 points)

The company is considering two new projects that operate in different lines of business. Hence, the firm's WACC cannot be used as the discount rate for these project's cash flows. Average betas were computed in order to find the appropriate discount rate for each project: Projects Project's Internal Rate of Return Average Beta Project 1 6.0% 1.0 Project 2 6.0% 1.5