Phillips Oil Incorporated is planning a large expansion program during the coming year and its capital budget is estimated at $280 million and the companys hurdle rate for all new investments is 28.75 percent. No other projects are under consideration. Phillips Oil wants to raise the funds in accordance with its target capital structure:

Market Values Debt 15%

Preferred stock 25%

Common equity 60%

Phillips Oil expects net earnings available to common shareholders this year of $110 million, and the payout ratio will be 40 percent. The company has a marginal tax rate of 34 percent.

External Sources of Funds:

Debt: Phillips would issue 20-year bond directly to institutional investors with a promise to pay 11% semiannually at 101.5% of par of $1000 up to $100,000,000 and no flotation costs. Above that amount, the coupon interest rate will be 13.5 percent also without flotation costs

Preferred: Up to $120,000,000 can be sold at par value ($60) to yield the investor 12 percent. Flotation costs are 4 percent on the first $120 million, then flotation costs increase to 6 percent on amounts above $120 million.

Common: Current market price per share of ownership is $25 per share. The last distributed earnings to the owners of the corporation were $3.50. Phillips long term sustainable expected growth rate is 12 percent. Flotation costs are 8 percent. Also, the current return on USA Treasury bond is 5% and the average market return in the equity market is 18.5%. Phillips year-to-date beta is 1.5.

As one of the deputies to the Chief Financial Officer of Phillips Oil, should the expansion program be undertaken?

please answer in excel