You have earned a position on the Board of Directors for my company

Here is what we are faced with:

We believe there is a smart investment decision out there to expand our manufacturing facility by making an initial investment of $80MM (That's right - lots of zero's $80,000,000). Our analysis has indicated there would be $22,500,000 in Operating cash inflows in each of the first 5 years (lots of new widgets we could build & sell if we expanded!!!!)

I need you to apply your FIN 305 & FIN 306 knowledge & start by:

• Determining our weighted average cost of capital.
• Find the IRR (It will be a whole number)
• Then make a recommendation to me as to whether we should ACCEPT this project or NOT (Our company's criteria for ACCEPTING a project is meeting or exceeding an IRR of 14%.)

Here is what I can share with you:

1. Our target capital strategy is
2. 58% Long Term Debt
3. 17% Preferred Stock
4. 25% Common Stock Equity
5. Our tax rate is 28%
6. Common stock equity:
7. Our current share price is $40
8. Last dividend paid was $2.
9. Our growth rate has been & is expected to stay steady at 5%.
10. Our company's risk (beta) has been rated at 0.65
11. The market return (Rm) is 13%
12. The risk free rate (Rf) has held steady at 8%

(Since we deliver a dividend, please AVERAGE the two equity costs (Gordon growth rate & CAPM) to determine the AVERAGE cost of equity for our company)

4. Preferred stock

1. We deliver a fixed dividend of $2.22
2. Our net proceeds from sale would be $28 per share

5. Long term debt

1. Our bonds are delivering (we are paying out) a yield/return of 9.5% to our bondholders