Statement of Facts

Victor Alexander owns Prospect Manufacturing, Inc. Prospect is a C corporation, which is currently taxed at 21% for Federal taxes. Prospect previously issued $1,000 par value corporate bonds that pays 6% annual interest. The corporate bonds have 12 years until their maturity. The current market price for the corporate bonds is $935. Prospect previously issued $70 par value preferred stock that pays 9% annual dividends. When the preferred stock was issued, it cost $2.50 per share to issue and sell. The current market price for the common stock is $47 per share. Prospect recently paid a dividend of $3.27 per share to the common stockholders. Prospect has historically been increasing the dividends it pays by 7% annually. The current capital structure of the business is 25% long-term debt, 15% preferred stock, and 60% common stock equity. Victor is considering purchasing new equipment for Prospects factory and has identified four mutually exclusive investment opportunities, which have the following estimated cash flows:

Project A

Investment (37,500)

Project B Project C

(75,000) (100,000) 19,000 40,000 21,000 35,000 22,000 30,000 20,000 20,000 18,000 20,000

Project D

(100,000) 25,000 25,000 35,000 30,000 30,000

Year 1 Year 2 Year 3 Year 4 Year 5

12,500 12,500 12,500 12,500 12,500

Part 1 Using Excel Formulas to Calculate the Weighted Average Cost of Capital

1. Calculate Prospects cost of long-term debt (yield-to-maturity). 2. Calculate Prospects after-tax cost of long-term debt. 3. Calculate Prospects cost of preferred stock. 4. Calculate Prospects cost of common stock equity (constant-growth valuation model). 5. Calculate Prospects weighted average cost of capital.

Part 2 Using Excel Formulas to Evaluate Investment Opportunities

1. For each project, calculate the net cash flows? 2. For each project, calculate the net present value? 3. For each project, calculate the internal rate of return? 4. Which project would you recommend be accepted? 5. Explain why you chose to accept the project you did.