Question ONE (8 marks):

A)Assume that "Tigers" company has the following target capital structure:

Debt = $100,000

Common equity = $55,000

The company is expected to pay interest on debt at a value of 7% and pays a tax rate of 35%. The risk free rate of return is 5%, while the return of the market is 9%. The company's stock is more risky than the market and it has a beta of 1.2.

i.Calculate the weighted average cost of capital for this company.

ii.If the internal rate of return (IRR) for the company is 12.5%, what do you think about the company?

Question TWO (10 marks):

A company is faced with two different projects with the following projected cash flows:

Years Project A Cash Flows Project B Cash Flow

0 LE 5,000 LE 5,000

1 zero LE 1,500

2 LE 6000 ZERO

3 LE 1000 LE 2,500

4 ZERO LE 1,000

Interest rates in the market are 10%.

a)Calculate the payback period for each project and based on your results, determine which project is the best if both projects are mutually independent, assuming that the limit for payback period is 1.5 years.

b)Calculate the Net present value for each project. Based on your results determine which project the company should invest in, if both projects are mutually exclusive.