Question: a) Travis & Sons has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The

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a) Travis \& Sons has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The company's tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This 3year project has initial costs of $325,000 and annual cash inflows of $87,000,$279,000, and $116,000 over the next three years, respectively. (1) What is the weighted average of cost of capital for this project? (5 marks) (2) What is the net present value of this project? Should we accept the project? Why? (5 marks) b) Explain what is the pure approach in determining the discount rate of a project when WACC cannot be used . (10 marks)

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