1. Calculate Weighted Average Cost of Capital (WACC)

 Debt 30%

Preferred Stock 15

Common Equity  55

Add'l Information:

Bond Coupon Rate  13%

Bond Yield to Maturity    11%

Dividend, Expected Common    $3.00

Dividend, preferred $10.00

Price, common $50.00

Price, preferred $98.00

Flotation cost, preferred  $5.50

Growth Rate   8%

Corp tax rate   30%

Calculate Individual costs for each security and weighted average cost of capital

2. Make capital budgeting decision using various valuation methods:

Company A is considering two mutually exclusive projects with the following assumed cash flow profiles:

Year          Project A       Project B

0                -$30,000         -$50,000

1                 $10,000          $15,000

2                 $10,000          $15,000

3              $10,000           $15,000

4              $10,000           $15,000

5 and after        0                        0

Company A’s cost of capital is 10%

Calculate the following values for each project using the time value tables and/or MS Excel.

A)    Payback period

B)    NPV

C)    Profitability Index

D)    IRR

E)     Make a recommendation as to the best project, if any for Company A’s undertaking.