Part B: Require Return for Capital Funding (Week 5 Milestone) Suppose that Smith Company is considering a new project. They are trying to determine the required rate of return for their debt and equity holders. See the information below: A 7.5% percent annual coupon bond with 20 years to maturity, selling for 104 percent of par. The bonds make semiannual payments. What is the before tax cost of debt? If the tax rate is 40%, what is the after-tax cost of debt? The firms beta is 1.2. The risk-free rate is 4.0% and the expected market return is 9%. What is the cost of equity using CAPM?

12/31/2018 12/31/2017 12/31/2016 12/31/2015 2 Revenue 3 Total Revenue 4 Cost of Revenue 5 Gross Profit 51,728,000 23,502,000 28,226,000 57,902,000 25,340,000 32,562,000 56,519,100 25,399,800 31,119,300 56,488,000 25,283,000 31,205,000 US 19,184,000 9,042,000 20,706,000 11,856,000 21,225,600 9,893,700 20,736,000 10,469,000 7 Operating Expenses Selling General and 3 Administrative Operating Income or Loss 0 Income from Continuing 1 Operations 2 Other Income/Expenses Net 3 Interest Expense 4 Income Before Tax 5 6 Income Tax Expense 7 Net Income -1,148,000 1,220,000 6,674,000 -1,507,000 1,288,000 9,061,000 -1,508,400 1,207,800 7,177,500 -2,256,000 853,000 7,360,000 2,696,000 3,978,000 4,130,000 4,931,000 1,956,600 5,220,900 1,708,000 5,652,000 e Project A Project B Project C Year o -100,000 -250,000 -500,000 Year 1 50,000 100,000 400,000 Year 2 30,000 100,000 50,000 Year 3 30,000 50,000 50,000 Year 4 20,000 50,000 50,000 0 UI Je