Your company is evaluating two projects and has collected the following information:

	Project A	Project B
Expected return (IRR)	12%	7%
Risk	Same as existing business	Same as existing business
Suggested source of financing	Equity	Long-term debt
After-tax cost of financing	14%	5%

The company currently has a capital structure consisting of 50% equity and 50% long-term debt.

1. Without doing any calculations, what should the company do and why?

a. Look for a better reason to make a decision

b. Accept only project A, since its expected return is greater than project B's

c. Accept only project B, since its expected return is greater than its cost of financing

d. Accept only project B, since its cost of financing is less than project A's

e. Reject both projects, since their expected returns are too low

f. Accept both projects, since they are not riskier than the existing business

2. What is the firm's overall (after-tax) cost of capital?

3. Based on the previous answers, what should the firm do?

a. Reject both projects

b. Accept project A and reject project B

c. None of the above

d. Accept both projects

e. Accept project B and reject project A