### Case Study: Ares Manufacturing $-$ Project Griffin #### Case Background Ares Manufacturing, a publicly traded leader in advanced materials, is considering a major strategic investment into a new product line, codenamed "Project Griffin." The project involves developing and manufacturing a new lightweight, high$-$strength composite material for the aerospace and automotive industries. The management team has tasked you, a senior financial analyst, with conducting a comprehensive financial evaluation of Project Griffin to determine its viability and its potential impact on the company. You must also address related financial management questions concerning the company's cost of capital, portfolio investments, and risk management strategies. The evaluation is divided into four parts. Please address all questions thoroughly, showing your calculations and explaining your reasoning. Adhere to four decimal places for intermediate calculations and final answers. $**$General Assumptions:$**$ For the purposes of this case, assume perfect capital markets. This means there are no transaction costs or bid$-$ask spreads unless explicitly stated. All securities are perfectly divisible and can be bought or sold at the quoted prices. $---$

### Part $1$: Determining the Firm's Cost of Capital $($WACC$)$ Before evaluating the new project, you must first determine the appropriate WACC for Ares Manufacturing. The company's capital structure and market data are as follows: $**$Equity Information:

Shares Outstanding: $2,000,000$

Current Stock Price: $$50\mathrm{.}00$ per share

Equity Beta $($$\_$E$)$: $1\mathrm{.}20$

$**$Debt Information:

Ares has one bond issue outstanding with a total face value of $$40,000,000.$ Coupon Rate:$**6\mathrm{.}0\%($paid semi$-$annually$)$

Years to Maturity:b$15$ years

Current Bond Price: $98\%$ of par value

$**$Market Information:

Risk$-$Free Rate $($r$\_$f$)$: $4\mathrm{.}0\%$

Market Risk Premium $($E$[$R$\_$M$]-$ r$\_$f$)$: $5\mathrm{.}5\%$

Corporate Tax Rate: $35\%$

$**$Questions:$**$

$1.$ Calculate the market value of Ares's equity $($E$)$ and debt $($D$).$ Determine the capital structure weights $($w$\_$E and w$\_$D$).$

$2.$ Calculate the cost of equity $($r$\_$E$)$ using the Capital Asset Pricing Model $($CAPM$).$

$3.$ Calculate the pre$-$tax cost of debt $($r$\_$D$)$ by finding the Yield to Maturity $($YTM$)$ of the company's bonds.

$4.$ Calculate the Weighted Average Cost of Capital $($WACC$)$ for Ares Manufacturing. $5.$ Discuss the appropriateness of using Ares Manufacturing's overall WACC as the discount rate for Project Griffin. What specific factors related to this new project might suggest a different discount rate should be used, and why? $---$