Problem #1 [23 marks[ Eastern Communications Corporation [ECCl is a Canadian Industrial company with several electronics divisions. The rm would like you to calculate the weighted average cost of capital as they are considering a new expansion project. You have been provided with the rm's most recent nancial statements as well as the following additional information: Ea stern Communications Corporation $millions Liabilities E: Shareholders' Equity Bonds, coupon =9%, paid semiannually (maturity 15 years, 51,000 face value) 510 Preferred Stock (Par value 520 per share) 2 Common Stock (1,000,000 shares outstandin_} 10 Retained Earnin_s Assets Cash 8: shortterm securities $10 Accounts Receivable Inventories 3' Plant 8: E ui ument Total 550 The financial manager has gathered the following information for the firm: Debt: The bonds are currently selling at a quoted price of 102.4. New debt would be issued at par ($1,000) with flotation costs of 2.5% Preferred Shares: The existing preferred shares are currently selling for $25 per share. The firm can sell 5100 par value preferred shares with a 12% annual dividend. The market price is expected to be $95 per share. Flotation costs for new preferred shares are estimated at 3%. Common Equity: The rm's common shares currently sell for $13 per share. The firm does not have enough cash on hand to finance the equity portion ofthe projects. ECC has a tax rate of 40% and a beta of 1.?9. You have observed the following from the market: an 3% market risk premium and a 2% risk free rate. Flotation costs for new common shares are estimated at 5%. The financial manager of ECC is evaluating equipment purchases with a total capital cost of $480,000 and shipping costs for equipment of $20,000. The present value ofthe after-tax operating cash flows will be =$339,044, present value of CCA tax shield will be $101,?T6, and present value of terminal (ending) cash ows will be $19,993. a) Calculate the discount rate the rm should use to evaluate projects with the same level of risk as the firm. [14 marks] b} Would this expansion create value for ECC? Perform a NP'v' analysis. Assume the asset class will remain open. [9 marks]