Sally Co. has a capital structure of 50% debt and 50% common stock equity. Sally wishes to maintain that ratio. Net income for the current year is $500,000. The loan officer at the bank has offered to lend money to Sally. The bank will charge 10% interest for up to $500,000 and 12% for any amount greater than $500,000. Sallys tax rate is 20%. Sallys common stock sells for $100 a share and pays a $5.00 dividend. The projected growth rate is 8%. New stock can be issued at $5 per share. After the $500,000 in net income, Sally will either borrow the funds needed or issue new common stock. Sally has to choose among the following four projects:

Project Initial Investment

In millions IRR

A $0.5 16%

B $1.0 12%

C $.06 15%

D $1.1 18%

a. Calculate Sallys component cost of capital for debt, old equity, and new equity.

b. Calculate all MCC figures.

c. How much can Sally borrow and still maintain her desired capital structure?

d. Make an Investment Opportunity Schedule listing the projects in order.

e. Which projects should Sally accept?