Plum Computer Company is headquartered in Anniston, Alabama with offices in New York and Los Angeles. Plum has $9 million debt outstanding. The 1 million outstanding shares of Plum's stock are currently selling for $20 per share although they are recorded on the company books at the issue price of $15 per share. Plum Computer has an asset beta of 1.50. The current risk-free rate and the annual effective yield on debt is 5.5%. The market risk premium is 11%. Plum's corporate income tax rate is 35%.

a) Assume the CAPM holds. Calculate the weighted average cost of capital for Plum.

(2 marks)

b) Plum is considering twoindependentcapital budgeting projects presented below. Assume the financing for the project is in the same proportion as that for the firm. For each project compute a new WACC using the given project beta for the risk associated with equity. Then evaluate each project and indicate whether or not the project should be selected and why?

(4 marks) Project

A B

Life

10 years 5 years

Annual Cash Flows

$10 million $12 million

Initial Outlay Project Beta

$50 million 0.00 $35 million 1.50