Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt:The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,026.

Common Stock:The firm's beta is 1.33, the market rate is 14% and the risk free rate is 5%.

Additionally, the firm has a marginal tax rate of 40 percent.

The firm's after-tax cost of debt is ________. (See Table 9.2)

The firm's cost of a new issue of common stock is ________. (See Table 9.2)

Based on the above infromation, the weighted average cost of capital is ________.

The firm in table 9.2 is considering investing in two projects with the following cash flows:

Project A B

Start Up $15,000,000 $25,000,0000

Years 1-5 $3,000,000 $2,000,000

Years 6-10 $2,000,000 $5,000,000

The NPV for Project A is

The NPV for Project A is

$1,333,019

$128,691

$533,230

-$149,798

The NPV for project B is:

$5,231,592

$4,478,840

$44,768,408

-$5,231,592

Based on the market price of the bonds and current capital structure, how many bonds must be sold?

Based on NPV, which project(s) should you accept:

Neither

Both A and B

A only

B Only

Based on a market price of $50, how many shares should be sold?

The IRR for Project A is:

14.4%

1.18%

11.8%

9.4%

The IRR for Project B is:

9.4%

5.42%

11.8%

0%

Based on IRR, which project(s) should you accept:

Both A and B

B only

Neither

A only