You recently went to work for CTC Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows of a proposed project.

Cost of project: $200,000

year after tax cash flow

1 $45,000

2 $45,000

3 $45,000

4 $45,000

5 $45,000

CTCs assets are $750 million, financed through bank loans, bonds, preferred stocks, and common stocks. Tax rate is 40 percent. The amounts are as follows:

Bank loans: $ 100 million borrowed at 3%

Bonds: $280 million, paying 5% coupon with semi-annual payments, and maturity of 10 years. CTC sold its $1,000 par-value bonds for $1050 and had to incur $50 flotation cost per bond.

Preferred Stocks: $120 million, paying $15 dividends per share. CTC sold its preferred shares for $210 and had to incur $10/share flotation cost.

Common Stocks: $250 million, beta is 2, the risk-free rate is 2 percent, and the market rate is 6%.

a) What is the after-tax cost of the loans?

b) What is the after-tax cost of the bonds?

c) What is the after-tax cost of the preferred stocks?

d) What is the after-tax cost of the common stocks?

e) Calculate the cost of capital. Please show your work precisely by indicating each component and weight.

f) Calculate the NPV, IRR, and payback period of the project. Use the cost of capital you found in e when calculating the NPV and IRR. Should you accept or reject the project? Why?