(Please number 6 problem with equations used and work shown!)

1. Company BW has issued 2,000 corporate bonds with a maturity value of $1,000 and a coupon rate of 6%. Coupon payments are made every 6 months and those bonds will mature in 6 months from today. Current market price of those bonds is $978.56.

Marginal corporate income tax rate is 34%, find the annual after-tax cost of debt for these bonds. [15 points]

*** HINT: What have you found? Semi-annual rate or annual rate?

(2) Company BW has $500,000 loan outstanding. The annual loan interest rate is 6% with monthly compounding (meaning BW is making monthly payments). Find the annual after-tax cost of debt for the loan. [10 points]

(3) Company BW has issued 2,000 preferred stocks. The par value is $100, dividend rate is 8%, and dividend is paid at the end of each year. Market price is $85 a share.

Find the annual cost of preferred stock. [10 points]

(4) Company BW has 50,000 shares outstanding and the market price is $23 per share. People believe this company is twice as risky as the stock market. Current T-bill rate is 3% and expected stock market return this year is 9%.

What is BWs annual cost of equity? [15 points]

(5) Find the overall (annual) cost of capital for BW (WACC). [20 points]

(6) Company BW has the following two investment opportunities (A and B).

a) Which project is better, according to NPV ? [15 points]

b) Which project is better, according to Modified IRR? [15 points]

***Lets not to consider the difference in the duration of these projects***

End of Year 0 1 Net Cash Flows Project A Project B -8,000 -6,000 500 2,500 11,500 3,500 3,500 3,000 2 3 4