Q1 Suppose you are a CFO of retail business, and your companys credit rating is A, which gives very low cost of borrowing. Since debt is typically a cheaper source of financing than is equity, why NOT your firm uses as close to 100% debt financing as possible? Please discuss the possibilities and pros/cons of raising capital from 100% debt?

Q2: Your Company needs to purchase new machine to meet the demand for its product. The cost of the equipment is $210,000. It is estimated that the firm will increase operating cash flow (OCF) by $28,000 annually for the next seven years. The firm is financed with 45% debt and 55% equity, both based on market values. The firm's cost of equity is 10% and its pre-tax cost of debt is 7%. The flotation costs of debt and equity are 4% and 6%, respectively. Assume the firm's tax rate is 35%. (Mark 40, 8 for each sub-question) (A) What is the firm's WACC? (B) Ignoring flotation costs, what is the NPV of the proposed project? (C) What is the weighted average flotation cost, f_A, for the firm? (D) What is the dollar flotation cost of the proposed financing? (E) After considering flotation costs, what is the NPV of the proposed project?