Part II

The company has the following capital structure:

Account	$	Costs before tax
Long-term Debt	1,500,000	10%
Preferred Stock	500,000	12%
Common Stock	3,000,000	20%

Calculate the weighted average cost of capital (tax is 40%)

Using the same cash flows in exhibit I find the NPV, PI, IRR and MIRR (Use your answer on part one as cost of capital). Which project(s) would you recommend and why?

Based on the following information and data in part II prepare Performa Income Statement. Also, calculate the DOL, DFL and DTL and earring per share.

Q = 20, 000 units

Price = $120

VC= $80

Fixed cost = $450,000

100,000 outstanding shares

Assume that the management has a target DTL of 6. How much debt needs to be retired (replace by common stocks if any) in order to achieve that goal? What would be the new WACC?