1.

ABC Equipment Inc. has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.32 and sells for $41 a share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 23 percent. What is the weighted average cost of capital?

A. 9.30 percent

B. 8.64 percent

C. 9.18 percent

D. 8.02 percent

E. 7.56 percent

2.

Elton & Daughters has a capital structure that is based on 55 percent debt, 5 percent preferred stock, and 40 percent common stock. The pretax cost of debt is 8.3 percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 25 percent. A project is being considered that is equally as risky as the overall company. This project has initial costs of $287,000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three years, respectively. What is the projected net present value of this project?

A. $105,308

B. $119,802

C. $99,014

D. $116,667

E. $109,329