Roberto Inc. is a manufacturing company. The company has always followed their ideal capital structure which the management insists is 40% debt and 60% equity capital. The company can issue bonds for 9% coupon rate with 22 years to maturity. The interest is paid semi-annually. The bonds can be issued with a price of $835.42 today. Roberto's marginal tax rate is 40%. For cost of equity, the company uses the CAPM based on SML. The risk-free rate in the market is 8% and the market rate of return is 14%. The company has a beta of 1.1. Roberto is experiencing a highly abnormal growth rate of 30%. This growth rate is expected to continue for four years. After year four, the growth rate is expected to return to a normal 8% and remain constant afterwards for the foreseeable future. Roberto just paid a dividend of $1.15. Furthermore, Roberto is evaluating several projects to invest in. The top project that is being considered will cost $1,000,000 and promises to pay $500,000 in year one, $400,000 in year two, $300,000 in year three and $100,000 in year four. This project will cease to exist with no salvage value at end of year four. So, the cash flow would look like the following:

Year CF ($ in 000's)

0 -1,000 (Initial Outlay)

1 500

2 400

3 300

4 100

Based on the information provided above, answer the following questions:

1. What is Roberto's cost of debt before taxes?

a. 11%

b. 12%

c. 10%

d. 8%

2. What is Roberto's after-tax cost of debt?

a. 6.6%

b. 7.2%

c. 6%

d. 4.8%

3. What is the company's cost of equity capital using the CAPM?

a. 9.6%

b. 8%

c. 14.6%

d. 12.09%

4. What is weighted average cost of capital (WACC) for Roberto Inc?

a. 10.02%

b. 11.40%

c. 12.86%

d. 14%

5. Using the information related to paid dividend, cost of equity and growth outlook for Roberto Inc., what should be the price for this supernormal growth stock today (P0)?

a. $25.32

b. $33.42

c. $39.21

d. $37.53

6. Using the cash-flows related to the top project Roberto is considering and the WACC you previously calculated, what is the expected NPV for the project (in 000's)?

a. $78.82

b. $109.45

c. $49.18

d. $53.09

7. Further evaluating the top project for Roberto, what is the anticipated IRR for the project?

a. 11.8%

b. 14.49%

c. 12.45%

d. 13.02%