The management of Metal Fabricating and Recycling (MFR) had enjoyed an extended period of revenue and earnings growth This period of strong performance had lasted for the past four years and shown compound average annual growth of 12 percent JvfFR's management was convinced that the recent strong growth was due to the company's entry into the recycling business and to its careful cultivation of its overseas customers.

MFR was a maker of heating and air-conditioning ductwork for commercial buildings and large residential buildings. The firm , in general a subcontractor on large building projeels, had a strong reputation in the region in which it operated. That region was the area of the United States bounded by Buffalo, New York, and Cleveland, Ohio, in the north and Louisville, Kentucky, and Evansville, Indiana in the south. That area was the primary industrial region in the United States in the period from early in the twentieth century to the 1970s. The decline since that time had abated somewhat, and the region was believed to be at least "holding its own" in terms of economic viability. In any case, :MFR operated in this environment from a position of dominance.

In terms of its operational strength and reputation, once the firm was contracted to participate in a construction project, its usual practice was to attend to the specific needs of the project through careful selection of materials. The desire was to pay special attention to the specific demands of the design, function, and purpose of the building and to the particular demands of the construction company. MFR designed, constructed (fabricated), and installed its product. Moreover, it guaranteed its work in a manner that assured a high level of serviceability for years to come.

In addition to its ductwork design and installation, the firm was also engaged in the reclamation of sheet metal, primarily ductwork, during the demolition of commercial buildings or large residential buildings. This recovered sheet metal was compressed into stacked sheets and sold directly to recycling companies. This portion of the business was highly profitable, and company management was considering ways in which to expand it geographically.

In addition to its dominance in its own geographic area, MFR had a very solid presence in an industrial region of France, the area roughly north of Paris and toward the Belgian border.

In fact, this region was similar in terms of economics to the area in the United States in which MFR operated. It was believed by some observers, however, that a recovery, or at least a strategy for an economic recovery, was not as well developed in the French region as in the US. region, known in the 1980s as the "rust belt"

In any event, therevenuefrom11FR's sales to its French customers was becoming an increasingly important part of its total revenue stream. An estimated 35 percent of the firm's cash flow would come from the overseas operation over the next three to five years. This was due to the gradual restoration of the French industrial region - unemployment was quite high in the region - and to MFR's well-established reputation as a reliable company. Table 1 outlines the film's cash flow for the past year

TABLE 1 Metal Fabricating and Recycling Statement a/Cash Flows 1995 ($000s)
Net income	$2,040
Depreciation	1,740
Increase acc. pay	520
Increase accruals	170
Increase acc. rec.	(1,040)
Increase inventory	(3,480)
Net cash flow from ops.	(50)
Fixed asset acquisition	(4,000)
Increase in notes payable	870
Increase in bonds	3,030
Payment of c/s dividends	(1,070)
Net cash flow from fin.	(1,220)
Net red'n. in cash & near cash	(1,220)
Cash & near cash; beginning of year	1,390
Cash & Near cash; end of year	170

Question 5: What is MFR's weighted average cost of capital? Is this a likely number for use as a discount rate in capital budgeting?