PLEASE SEE ATTACHED WORKSHEET

PLEASE SEE ATTACHED WORKSHEET
Week 8 Assignment Weighted Average Cost of Capital (WACC) 1. The capital structure for Mills Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,050 for bonds, $20 for preferred stock, and $40 for common stock. Assume a 34% tax rate. Financing Type % of Future Financing Bonds (8%, $1k par, 16 year maturity) 36% Common equity 45% Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) 19% Total % 100% Compute the company’s WACC. WACC 36% 5.97% PS 19% 8.82% CS 45% 6.63% 2. The Milton Company plans to issue preferred stock. Currently, the company’s stock sells for $120. Once new stock is issued, the Milton Company would receive only $99 (due to flotation costs). The dividend rate is 12%, and the par value of the stock is $100. Compute the cost of capital of the stock to your firm. Show all work. 3. The Dayton Corporation is considering a new investment, which would be financed from debt. Dayton could sell new $1k par value bonds at a new price of $950. The bonds would mature in 15 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Dayton for bonds, assuming a 34% tax rate. Show work. 4. Farrah Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%. Project 1 Project 2 Initial investment $(185,000) $(1,100,000) Cash inflow Year 1 $230,000 $1,450,000 Compute the following for each project: -185000 -1100000 230000 1450000 $205,357.14 $1,294,642.86 $20,357.14 NPV 1.11 PI 24% IRR Which project should be selected? Why?