PART ONE

ABC Corporation has the following financial characteristics/data:

EQUITY

The company is expected to pay an annual dividend of $4.50 on its common stock in one year. The current stock price is $73.50 per share. The company announced that it will increase its dividend by 3.75 percent annually. The market value of its Equity is $9.5 billion. The Beta Coefficient of ABC Corporations stock is 1.28

PREFERRED STOCK

The company has an issue of preferred stock outstanding with a coupon rate of 5.30 percent that sells for $93.90 per share. The par value is $100. The market value of its Preferred Stock is $1.0 billion

DEBT (3 bond issues)

The information regarding ABCs bonds is as follows: (Semi-annual coupon payments & $1,000 par value per bond)

Coupon RateMaturityFace ValueMarket Price (% of Par)

7.20%5 years$2.0 billion117.750

3.95%6 years$2.0 billion104.500

7.55%8 years$1.8 billion127.300

Total$5.8 billion

OTHER INFO

U.S. T-Bills are paying 1.65%

The Market Risk Premium is 7.0%

REQUIRED - Calculate the Weighted Average Cost of Capital (WACC) for ABC Corporation, using the market values of each of the components of the WACC. You MUST Show ALL work, including all of the equations used, AND, BE PREPARED TO DISCUSS WITH ME. This is to be completed individually it is not a team or group project

PART TWO

Using the WACC you calculated for ABC Corporation in Part One, answer the following:

ABC Corporation is considering two projects,

Project 1 has an initial cost of $100,000,000. The projected net cash flows for each year are $20,900,000 $21,800,000, $24,600,000, $25,500,000,and $17,800,000 respectively. What are the NPV and IRR associated with Project 1? Should ABC invest in the project?

Project 2 will produce net annual cash flows of $38,200,000, $46,900,000, $57,600,000, and $23,100,000, over the next four years, respectively, and has an initial cost of $112,800,000. What are the NPV and IRR associated with Project 2? Should ABC invest in the project?

If the projects are mutually exclusive, in which project should ABC Corporation invest, and why?