You will evaluate the project based on WACC. Your firm currently has a single $100,000 par value bond outstanding with 10 years remaining until maturity. This is your only bond issue and its current market value is $111,000 based on a YTM of 8%. Your firms common stock is currently selling for $18 per share with 30,000 shares outstanding. Your firms beta is .98. The S&P 500 and 3-month T-Bills is averaging 7.5% and 4% per year respectively.

2. Calculate the required rate of return on debt

3. Calculate the required rate of return on common stock

4. Is the firm primarily debt or equity-financed?

a. Evaluate its capital structure in light of the debt overhang theory.

5. Calculate the WACC

. Use the WACC calculated to evaluate the project based NPV criteria.

a. Would you recommend the firm pursue this project, why?

. Perform a sensitivity analysis to see how sensitive your decision is to a 15% change is the projected start-up costs for the product.

a. How do you interpret this result?

. Assume that this is your firms only current project and that once it ends in 4 years time the free cash flows of the firm will continue to grow at a rate of 5% per year.

a. What is your best estimate of the FCF in year 5?

b. What is your best estimate of the V4 (firms total market value in year 4) according to the DCF model?

c. What is your best estimate of the V0 (firms total market value today) according to the DCF model?

d. What is your best estimate of the stock price today?