RST Company has 8.5 million shares of common stock outstanding and 200,000 7.5% semiannual bonds outstanding, and the par value is $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.30. The bonds have 15 years to maturity and currently sell for 93% of par. The market risk premium is 7%, T-bills are yielding 5%, and RST Company's tax rate is 35%.

a) What is the firm's market value capital structure? (The percentage of the debt and the percentage of the equity)

b) If RST Company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?

c) What is the value of the rate?

RST Company (in DEMO 2) consider taking up an investment project. They need to invest 30 million for the project. Assume that all the information of the firm is same as Q. 5 and total expenses are 70% of revenue with no depreciation expense.

a) What is the NPV break-even sales?

b) Calculate the rate of return of debtors and investors at the NPV break-even sales.

c) Are debtors and investors getting back the rate of return they expected?