Part A (15 Marks) Firm XYZ has 2.5 million outstanding stocks, each selling for $14 per share. The firm's debt is publicly trading at 85 percent of its $7.5 million face value. The firm pays a 4.7% rate of interest on its new debt and has a beta of 1.8. The corporate tax rate is 40%. Assume that the risk premium on the market is 5% and that the current Treasury bill rate is 2%. a) Compute WACC b) Consider project A: the project costs 4 million and will generate after-tax (year-end) cash flows of $0.80 million for 4 years. The project has the same risk as the overall firm. Should the project be accepted? c) Consider now project B: the project costs 1 million and will generate after-tax (year-end) cash flows of $0.20 million for 8 years. Note that this project presents no risks. Should the project be accepted? d) Consider finally project C: the project costs 12.5 million and will generate after-tax (year-end) cash flows of $1.5 million for 8 years. The project is less risky than the overall firm, and hence has a beta of 0.7. Should the project be accepted? Part B (15 Marks) A firm wishes to raise funds in the following proportions: 20% debt, 20% preferred shares, and 60% common equity. Assume the cost of internally generated funds is 15%. Annual after-tax cost of debt is 5.86%. Cost of preferred equity is 6.12%. It believes all of the common equity component can be raised using internally generated funds. a) Find the WACC b) Now suppose the firm wants to raise $10 million for investment purposes, and it has only $4 million of internally generated funds available. Determine the "break point" of the common equity component. Break point is the maximum investment in which all targeted equity can be financed internally. c) Determine the marginal cost of capital (MCC) if the firm must raise funds beyond the break point. Assume the cost of new common equity issues is 20%.