******Please show work*******

1. Eagle Creek Resources, Inc. is preparing its analysis of capital projects for the next capital budgeting cycle. As part of the preparation, Eagle Creek needs to estimate its cost of capital. Eagle Creek has a market to book ratio of 2.5, a 50% debt ratio, a 75% dividend payout ratio and a 30% marginal tax rate. Eagle Creek has no preferred stock. The companys most recent earnings per share were $4.00. Eagle Creek expects to earn a net income next year of $45 million. Eagle Creek has a bond issue outstanding that has a 5.5% coupon rate, a $1,000 face value, and 15 years remaining until maturity. The bonds currently sell for $986.50 each. New debt and would be privately placed thus incurring no flotation cost. The companys stock is currently quoted at a price of $25.00 per share. New stock issued would incur a 10% flotation charge. Eagle Creek uses the dividend growth model (DCF) to estimate the cost of equity capital, and assumes that future growth will be constant. Calculate the following for Eagle Creek Resources: (Hints: the market to book ratio is important in this problem use the sustainable growth from chapter 3 in your text to find g.)

1. Before tax cost of debt

2. After tax cost of debt

3. Cost of internal equity (retained earnings)

4. Cost of external equity (new common stock)

5. WACC using internal equity

6. WACC using external equity

7. Break point for internal equity

2. Given the following information about four mutually exclusive projects that will be repeated indefinitely, complete the table information (the shaded blanks). Assume that all projects are equally risky and will have the same cost of capital. A and B are mutually exclusive of each other, but independent of C and D, which are mutually exclusive of each other. Which project(s) should be chosen? (Note: This question is not related to the previous question. That is to say that the WACC for this table is not necessarily the same as you calculated in the previous question. Hint: The starting point for this problem is to find the terminal value for project A and use that to find the cost of capital (WACC).)

	A	B	C	D
CF0	($2,700,000)	($1,850,000)	($1,800,000)	($2,650,000)
Inflows	$850,000			$700,000
Project Life	7	4	5
NPV		$900,000	$600,000
IRR				24.00%
MIRR	18.50%
Terminal Value
WACC