This financial planning project is split into several parts Each section has its own tab. Section Problem Introduction TAB This tab Morrissey Financial Information TAB You will find all the given data here 1 Cost of Capital : Capital Structure TAB This section is split into two tabs: Cost of Capital A and Cost of Capital B Cost of Capital A concentrates on the developing Morrissey's Capital Structure Problem: a) Calculate the firm's capital structure based on book and market values and compare with the target capital structure. 2 Cost of Capital: WACC TAB b) Calculate the cost of debt based on the market return on the company's existing bonds. c) Calculate the cost of preferred stock based on the market return on the company's existing preferred stock d) Calculate the cost of retained earnings using three approaches, CAPM, dividend growth, and risk premium. Reconcile the results into a single estimate e) Calculate the WACC using equity from retained earnings based on your component cost estimates and the target capital structure 3 Capital Rationing: Finding the Breakpoints TAB This section calculate the breakpoints f) Where is the first breakpoint in the MCC (the point where retained earnings runs out)? Calculate to the nearest $.1M. g) Estimate the cost of equity raised through the sale of new stock using the dividend growth approach h) Calculate the WACC after the first breakpoint. i) Where is the second breakpoint in the MCC (the point at which the cost of debt increases.) j) Calculate the new cost of debt based on the additional lending information. k) Calculate the WACC after the second break. Calculate to the nearest $0.1M. 4 MCC - IOS Plot TAB In this section we plot the Marginal Cost of Capital and the Investment Opportunity Schedule This tab MCC-IOS is to be used as a template for your graphs Use the Commands Insert>line and Insert>rectangle to create plot k) Plot Marginal Cost of Capital. l) Plot IOS on the same axes as the MCC. Answers are to be entered in the black outlined, yellow boxes Supporting data is to be entered in the underlined yellow boxes. Enter all percentages as decimals

Morrissey Financial Data Debt issued 18,000 30 year bonds 10 years ago at $ 1,000 par value with 5% coupon rate similar bonds now selling in the market at 4% Preferred Stock issued 20,000 shares 6 years ago at $ 100 par value with dividend of $6 and floatation costs of $10 similar preferred issues are now selling in the market at $ 100 Common Equity issued 2,300,000 shares at $ 9.50 Accumulated retained earning is now $ 5,000,000 Market Price is: $ 11.25 Target Capital Structure Debt 35% Preferred 5% Equity 60% Additional Financial Information Marginal Tax Rate 35% Common Equity Floatation cost 5% Short Term Treasury yields 2.5% Equity Market return is 8.5% Beta is 0.9 Indefinite expected growth rate: 3% Last annual common stock dividend $ 0.50 per share Expected next years' earnings $ 5,000,000 Firm can borrow up to $ 3,500,000 at market return of old debt lenders will demand 7% for borrowing beyond Investment Opportunity Schedule Project IRR Capital Requirement A 14% $ 3,000,000 B 8% $ 2,500,000 C 6% $ 2,000,000 D 5% $ 1,000,000 $ 8,500,000 Total of all Projects

Cost of Capital: Capital Structure TAB score A Calculate the firm's capital structure based on book and market values and compare with the target capital structure. Debt: Number of Bonds Issued X Bond Face Value 3 Pts Book Value of Debt Bond Market Price Caluculation Using Excel: Number of Bonds Issued Market Semi-annual Interest Rate: X Bond Market Price Interest Payment Periods Remaining: 5 Pts Market Value of Debt Semi-Annual Interest Payment: Single Bond Face Value: Preferred Stock: # of Preferred Stock Shares Issued X Preferred Stock Face Value 3 Pts Book Value of Preferred Stock Preferred Stock Market Price Caluculation Using Excel: # of Preferred Stock Shares Issued Preferred Stock Dividend per Share: X Preferred Stock Market Value Market Rate of Similar Stock: 3 Pts Market Value of Preferred Stock Common Equity: + Retained Earning Balance # of Common Stock Shares Issued X Common Stock Issue Price 4 Pts Book Value of Common Stock # of Common Stock Shares Issued X Common Stock Market Value 3 Pts Market Value of Common Stock Capital Structure Comparison: Book Values Market Values Target Value Weight Value Weight Weights Debt Preferred Common Equity 4 Pts total Total 0 25 Points Possible

Cost of Capital: Weighted Average Cost of Capital TAB points B Calculate the cost of debt based on the market return on the company's existing bonds. Debt: Current Bond Market Yield X 100% - Marginal Tax Rate 3 Pts Cost of Debt C Calculate the cost of preferred stock based on the market return on the company's existing preferred stock Preferred Stock: Current Preferred Stock Dividend per Share Market Price - Floatation Cost 3 Pts Cost of Preferred Stock D Calculate the cost of retained earnings using two approaches: CAPM & Dividend Growth Model. Average the results into a single estimate for the Cost of Common Equity CAPM: Risk Free Rate + - Equity Market Return - Risk Free Rate X beta 4 Pts Cost of Retained Earnings Dividend Growth: Latest Common Stock Dividend X 100% + Growth Rate Formula Numerator / Common Stock Market Price + Growth Rate 4 Pts Cost of Retained Earnings Average Cost of Retained Earnings 1 Pts E Calculate the WACC using equity from retained earnings based on your component cost estimates and the target capital structure Target Weights Cost Factors Debt Preferred 6 Pts Common Equity WACC Total 25 Points Possible

Capital Rationing: Calculating Breakpoints TAB points F Where is the first breakpoint in the MCC (the point where retained earnings runs out)? Calculate to the nearest $.1M. Dividends: Latest Common Stock Dividend X 100% + Growth Rate X # of Common Stock Shares Issued 3 Pts Amount of Common Dividends Preferred Stock Dividend X # of Preferred Stock Shares Issued 2 Pts Amount of Preferred Stock Dividends 1 Pts Total Dividends Next Year's Earnings - Total Dividends 2 Pts Retained Earnings Avaiable Retained Earnings Avaiable / / Target Weight for Common Equity First Breakpoint 2 Pts Rounded to nearest $.1M G Estimate the cost of equity raised through the sale of new stock using the dividend growth approach Dividend Growth: Latest Common Stock Dividend X 100% + Growth Rate Formula Numerator / Common Stock Market Price - - Floatation Costs per Share Formula Demoniator + Growth Rate 4 4 Pts New Cost of Common Equity H Calculate the WACC after the first breakpoint. Target Weights Cost Factors Debt Preferred 6 6 Pts Common Equity WACC I Where is the second breakpoint in the MCC (the point at which the cost of debt increases.) Add'l Lending Available / / Target Weight for Debt 2 Pts 2nd Breakpoint G Calculate the new cost of debt based on the additional lending information. Bond Yield for New Debt X 100% - Marginal Tax Rate 2 Pts New Cost of Debt K Calculate the WACC after the second break. Calculate to the nearest 0.1%. Target Weights Cost Factors Debt Preferred 6 Pts Common Equity WACC Total 30 Points Possible

MCC - IOS Plot TAB points 10 k Plot Morrissey's MCC. 10 l Plot Morrissey's IOS on the same axes as the MCC. 16% Marginal Cost of Capital and Investment Opportunity Schedule 14% 12% 10% 8% Cost of