All returns are annual returns unless indicated otherwise.

$1.$ The capital structure of a firm consists of debt and equity. The firm has $300,000$ bonds outstanding that are selling at par value. The par value of the bonds is $$1,000.$ Bonds with similar characteristics are yielding a before$-$tax return of $8\%.$ The company also has $10,000,000$ shares of common stock outstanding. The stock has a beta of $1\mathrm{.}50$ and sells for $$90$ a share. The annual rate of return on U$.$S$.$ Treasury bills is $5\%$ and the annual market rate of return is $11$ percent. The firm$$s tax rate is $25$ percent.

a$)$ Find the company$$s weighted average cost of capital $($WACC or RWACC$).$

b$)$ The firm is considering a new project that is expected to generate annual operating cash flow $($OCF$)$ of $$6,000,000$ for five years$*.$ The project requires an initial investment $($or initial cost$)$ of $$20,000,000.$ The assets used in the project will have a before$-$tax market value $($salvage value$)$ of $$4,000,000$ at the end of the project in year $5.$ Assume that the assets are fully depreciated over five$-$year life of the project and the book value at the end of year $5$ is zero. The project also requires an initial investment in net working capital of $$1,000,000,$ which is fully recoverable at the end of the project $($i$.$e$.,$ year $5).$ The project has the same risk as the overall firm. Find the net present value $($NPV$)$ of the project.

$*$Operating cash flow $=$ After$-$tax net income $+$ Depreciation