1. a. Suppose you are tasked with coming up with a firms weighted average cost of capital to be used to evaluate a project that has the same risk as the firms overall cash flows.

You have collected the following information:

The risk-free rate is 3% and the estimated Beta is 1.2 The market risk premium is 5%.

The price per share is $50, and there are 2 million shares outstanding.

The Book Value of Debt is $50 million and is currently selling at 95% of par. It is priced to yield

5%. Assume a tax rate of 35%

Calculate the firms overall weighted average cost of capital.

b. Suppose the firm is now considering a project that has more risky cash flows than that of the firm. Should the firm use the weighted average cost of capital you calculated in part a? Explain your answer. Would you be more likely/or less likely to reject this new project if you used the weighted average cost of capital you found in part a. Explain your answer.

2. Suppose that Match Group (Match.com) expects to pay its first ever dividend of $.20 per share next year (year 1). The dividend is expected to grow at rate if 20% per year for the next three years. After that dividends are expect to grow steadily at a lower rate of 9.5% thereafter. Suppose that the cost of equity is 11%.

a.Find the value of the stock. Show your work, writing out the equation you are using.

b. Suppose the stock is currently selling at $15. Do you recommend buying or selling the shares? Explain.