QUESTION 6

Use the following information to answer the next three questions. Franklin Inc. is considering a project that has an initial outlay of $100 million and produces the following cash flows (in order) over the next five years:$10 million, -$5 million, $40 million, $45 million, $20 million. The company will finance the project by issuing $25 million of debt, $60 million of common stock, and $15 million of preferred stock. The company plans to issue new debt, new preferred stock and new common stock to finance the project. Franklin's 5 year, 10% coupon debt is priced to yield 10%. New 5 year debt will also carry an 10% coupon, but the company will incur a 7.5% floatation cost of par. Franklin's common stock paid a $2 dividend last year, which is expected to grow at a 5% rate forever. The common stock is currently worth $50, but the company will pay a 2% floatation cost on new shares. Franklin's preferred stock pays a $1 dividend and is worth $15. New preferred shares will incur a floatation cost equal to 1% of their market value. The company's marginal tax rate is 45%. Find the company's after tax cost of debt. Round intermediate steps and your final answer to four decimals and enter your answer in decimal format (.XXXX).

QUESTION 7 Find the company's cost of external equity. Round intermediate steps and your final answer to four decimals and enter your answer in decimal format (.XXXX). 6.25 points

QUESTION 8 Should the project be accepted?

Yes

No

The company would be indifferent between accepting and rejecting the project.

Cannot be determined.