You have recently been hired by Weston Inc., in the finance area. Weston Inc., is considering an expansion for its core business for year $2009$ from two mutually exclusive projects. The projects being considered have similar risk characteristic to the company itself. Since the investment is part of company$$s effort to expand its business, WI plans to use retained earnings and issue new bonds to facilitate one of the two projects as well as other new business investment being evaluated by your WI$$s colleagues. WI$$s marginal tax rate is $35\%.$

The resulting capital structure is following: Addition to Retained Earnings $$150,000,000$ New Issue Debt $$100,000,000($Market Value$)$

Stocks

WI stock$$s beta is $1\mathrm{.}30.$ Currently, one$-$year T$-$bill rate is $2\mathrm{.}5\%$ and the S&P $500$ index return is $7\mathrm{.}5\%.$ Additionally, starting from this year, WI plans to pay dividends at a growing rate of $3\%.$ Last week, the company paid dividend of $$1\mathrm{.}5$ per share.

Bonds

Currently, WI$$s previously issued bonds are selling in the market for $$875\mathrm{.}65.$ The bonds will mature in $11$ years, carry coupon rate of $8\%$ and pay coupon annually. In order to pursue the investment, CFO of the company has negotiated with an investment bank and arrived at a conclusion that WI can issue new $10-$year bonds with face value of $$1,000$ pay annual coupon of $11\%$ and can be sold in the market for $$1,100.$ The investment bank will charge $5\mathrm{.}5\%$ fee on selling price. WI will issue these bonds totaling $$100,000,000.$

CF of the projects

Machine A cost $$95,000,000.$ This machine will increase earning before interest and taxes $($EBIT$)$ by $$5,650,000$ per year, on average, for the first $10$ years. Starting from year $11,$ annual EBIT will increase at a very low growth rate of $1\mathrm{.}5\%.$ Assume that IRS allows this type of machine to be depreciated over $10$ years. However, you know that this machine could last a really long time. Hence, you assume that Machine A will last forever. To operate the machine properly, workers have to go through a training session that would cost $$600,000$ after$-$tax. Additionally, it would cost $$800,000$ after$-$tax to install this machine properly. Machine A will also require that WI increase inventory of $$2,000,000$ to reach the most efficient machine capacity.

The assignment

Your boss requests that you analyze these two projects and make an investment recommendation. During a brief with him this morning, he asked you the following questions.

Question. What is the required rate of return on WI$$s stock and What should be WI$$s current stock price and What is the yield to maturity on WI$$s outstanding bonds and What would be the rate of return to investors from newly issued bonds and Why are the $[$percentage$]$ costs of currently outstanding debt and newly issued debt different and What would be the $[$percentage$]$ cost to the company from newly issued bonds and What should be an appropriate hurdle rate $[$require rate of return$]$ to evaluate these two new projects and Evaluate projects$$: NPV; PI; and IRR Note that each project has three different type of cash flow being evaluated $1)$ Initial Outlay $2)$ Annual free cash flow $3)$ Terminal cash flow and$/$or terminal value of all future cash flows. Please solve the numerical also.