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RMEDIATE stions 18-21) figure Southern should use when evaluating its project? 18. WACC and NPV Och, Inc., is considering a project that will result
RMEDIATE stions 18-21) figure Southern should use when evaluating its project? 18. WACC and NPV Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million at the end of the first year, and these savings will grow at a rate of 5 percent per year indefinitely. The firm has a target debt-equity ratio of .65, a cost of equity of 15 percent, and an aftertax cost of debt of 5.5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm under- takes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Under what circumstances should Och take on the project? 19. Preferred Stock and WACC The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? 20. Debt: Preferred stock: Common stock: Market: 40,000 bonds with a 7 percent coupon rate and a current price quote of 119.80; the bonds have 25 years to maturity. 150,000 zero coupon bonds with a price quote of 18.2 and 30 years until maturity. 100,000 shares of 4 percent preferred stock with a current price of $78, and a par value - $100. 1,800,000 shares of common stock; the current price is $65, and the beta of the stock is 1.1. The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent. Flotation Costs Goodbye, Inc., recently issued new securities to finance a new TV
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