PLEASE DONT USE EXCEL.

2 Suppose you have been hired as a financial advisor to a large campany. The campany is looking at setting up a manufacturing plant overseas to produce a new line of product. This will be a five-year project. The tax-rate is 35%, the expected market risk premium is 5% and Tressury-Bill Rate is given as 8%

Debt: 3,000 5% coupon bond outstanding, 15 years to maturity, selling for 92 percent of par, the bond have a $ 1,000 par value each and make semiannual payments.

Common Stock: 200,000 shares outstanding, selling for $75 per share, the beta is 1.4.

Preferred Stock: $150,000 shares of 5% preferred stock outstanding, selling for $60 per share.

a) Whats the firm Market Value and Weights of Capital Structure?

b) What is the pre-tax cost of debt value?

c) What is after tax cost of debt value?

d) What is the cost of preferred stock value?

e) What is the cost of common stock value?

f) If the campany is evaluating a new investment project that has the same risk as the firms tyipical project what rate should the firm use to discount the projects cash flows? How do you interpret the WACC (Weighted Average Cost of Capital) result of the campany?

g) The campanys president asked you about the capital structure. He wants to know whether preferred stock or debt is cheaper. What would you suggest to your President about the current capital structure of the campany?