On January 1, 2010 the total market value of Acme Co. was $50 million. During 2010, the company plans to raise and invest $10 million in new assets. The firm's present market value, optimal capital structure is $10 million debt and $40 million equity.

The current bonds have annual coupons of 11%, 15 years to maturity, a $1000 face value and sell for $1020 each.

The company has a beta of 1.3, the long-term T-bond rate is 5%, the return on the NYSE composite index has averaged 12%.

The common stock is currently selling at $45 per share but can only be sold to net the company only $43 a share after investment banking costs. The next dividend D1 is $2.84 and the company has an expected growth rate of 7.5%.

The marginal tax rate is 40%.

a. Calculate rd. (4 points)

b. Find the rs by the CAPM approach and by the DCF approach and take the average (4 points)

c. Calculate the WACC (2 points)

d. If we had the following investment opportunities which ones should it accept given your answer in part c? (1 point)

Return Cost

A20500,000

B15200,000

C13400,000

D9500,000