Problem 1

LaFinistra Corporation plans to invest in one of the new projects, and the cost of that project is $272,250.00, with the following information, summarized in the Table below. This project is considered by the Corporation of low risk; therefore, the Corporation uses a WACC of 10.21% for this project.

Year	Cash Flow (all figures are in $)	Expected Abandonment Cashflow (all figures are in $)
0	(272,250.00)	0
1	131,313.46	231,111.90
2	102,336.66	164,654.35
3	66,054.51	120,934.35
4	51,662.81	39,992.90
5	35,116.29	-

Required: After how many years should LaFinistra Corporation abandon the project? Make sure to show your work and explain your approach in writing in a few lines.

Problem 2

The financial manager of LaTavola Corporation plans to estimate the weighted average cost of capital for the Corporation. Following are balance sheets and some information about LaTavola Corporation:

Assets

Current assets $38,000,000

Net plant, property, and equipment $123,000,000

Total Assets $161,000,000

Liabilities and Equity

Accounts payable $32,000,000

Accruals $9,000,000

Current liabilities $41,000,000

Long term debt (40,000 bonds, $1,000 face value) $40,000,000

Total liabilities $81,000,000

Common Stock 10,000,000 shares) $30,000,000

Retained Earnings $50,000,000

Total shareholders equity $80,000,000

Total liabilities and shareholders equity $161,000,000

LaTavola stock is currently selling for $9.67 per share, and LaTavola Corporation bonds are selling for 96.95% of the par of $1,000 per bond. These bonds have a 7.25 percent annual coupon rate, with semi-annual payments. The bonds mature in eighteen years. The beta for LaTavola Corporation is approximately equal to 1.45.

The yield on a 25-year Treasury bond is 5.60 percent. The average return on the market portfolio is 11.55%. LaTavola Corporation. is in the 22 percent tax bracket. What is the estimate of LaTavolas WACC?