Question 1. A firm has the following capital structure. The corporate tax rate is 35%. Determine the after-tax weighted average cost of capital for the

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Question 1. A firm has the following capital structure. The corporate tax rate is 35%. Determine the after-tax weighted average cost of capital for the firm.

Type	Amount	Return	Weight
Mortgages (debt)	25,000,000	0.05	0.040
Bonds	200,000,000	0.08	0.323
Common Stock	225,000,000	0.1	0.363
Preferred Stock	50,000,000	0.08	0.081
Retained Earnings	120,000,000	0.12	0.194

9.38%

8.41%

4.59%

6.10%

Question 2-

You have a project that will involve the purchase of real estate and renovation of the real estate. Your analysis indicated the project should have an IRR of 10%. Financing will consist of a mortgage (debt) of $90,000 which represents 70% of the financing. The pretax cost of debt is estimated to 8.5%. The remaining proportion of the financing will come from selling shares of your stock portfolio. Historically, your return has been 11%. Your marginal tax rate is 21%. Should you pursue the project and what is the WACC?

Yes, the WACC is 9.25% and is less than the IRR of 10%.

Yes, the WACC is 7.308 % and is less that the IRR of 10%.

Yes, the WACC is 8.001% and is less than the IRR of 10%.