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

a) 58% Long Term Debt

b) 17% Preferred Stock

c) 25% Common Stock Equity

2) Our tax rate is 28%

3) Common stock equity:

a) Our current share price is $40

b) Last dividend paid was $2.

c) Our growth rate has been & is expected to stay steady at 5%.

d) Our company's risk (beta) has been rated at 0.65

e) The market return (Rm) is 13%

f) 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

a) We deliver a fixed dividend of $2.22

b) Our net proceeds from sale would be $28 per share

5) Long term debt

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