XYZ company's stock is trading at $40 per share, and there are 10 million shares outstanding. The company's bonds have a market value of $50 million and a yield to maturity of 4%. It has excess cash on its balance sheet of $2 million. You estimate the stock's beta to be 1.2. The equity market risk premium is 7%, the tax rate is 35%, and the risk free rate is 3.8%.

a. What is the company's WACC?

b. Use the following table of income statement and balance sheet forecasts to compute free cash flows for the company in year 1 and year 2. All numbers are in millions. You may put your free cash flow numbers in the blank grid below the forecast table.

Table of Forecasts Today Year 1 Year 2 EBIT 60 65 68 Depreciation Capital Expenditures Level of Working Capital