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Q1.What is the cost of capital (WACC) for Foggy Futures Weather Forecasters?

The firm is in the 40% taxbracket. The optimal capital structure is listed below:

Source of Capital WeightLong-Term Debt 25% Preferred Stock 20% Common Stock 55% Debt:(Debt issued with a coupon interest rate of 15%. The bonds have a 10-year maturityand a $1000 face value, and they will be sold to net $980 after issue costs. Marginaltax rate is 40%) .PreferredStock:(Preferred stock will cost Ewing 10% after tax.) CommonStock:(Common stock pays a dividend of $2 per share. The current market price is $15.Dividends are expected to increase at an annual rate of 5% for the foreseeable future.No external equity will be used for the financing)

Q2) Alpah Company is planning to open a new store. The equipment and fixtures cost 250,000 and bedepreciated to $0 over a 5 year period on straight line base. The new store will require Alpha to increase itsnet working capital by 200,000 at time 0. First year sales expected at $1m and to increase at an annual rateof 8% over the expected 10-year life of the store. Operating expense projected to be $700,000 during thefirst year and to increase at 7% annual rate. Salvage value anticipated at $10,000 at the end of 10 years. Taxrate at 40%.Calculate• Net present value, using 18% required return.• Should Benford accept the project?• Internal rate of return• Profitability index.


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