Problem $2(70$ marks$)$: Atlantic industries has $$20,000,000$ in bonds outstanding with a coupon rate

of $7\%$ paid semiannually and a maturity of $10$ years. The bonds are currently selling at a quoted price

of $92.$ The company also has $35,000$ shares of $10\%$ preferred stock outstanding $($ $$100$ par$),$ currently

selling for $$96$ per share. In addition, the company has $1,000,000$ common shares outstanding, selling

for $$45$ per share. The firm has a tax rate of $40\%,$ a beta of $2,$ an ROE of $15\%,$ and a dividend payout

ratio of $40\%.$ The risk$-$free rate is $2\%,$ and the return on the market portfolio is $10\%.$

A$.$ Calculate the capital structure market value weights, cost of debt, cost of preferred equity,

cost of common equity, and WACC. $(20$ marks$).$

B$.$ Over the last two years, Atlantic industries incurred a cost of $$50,000$ for conducting a

feasibility study on a new project. The project requires purchasing a new machine that will

cost $$1,500,000$ plus an additional $$300,000$ in installation costs. Management estimates that

the firm will obtain annual operating revenues before taxes of $$1,250,000$ and incur annual

operating expenses before taxes of $$250,000$ over the economic life of the project. The

specifications of this machine indicate an economic life of five years and management

estimates that at the end of the economic life, the machine will have a salvage value of

$$350,000.$ This machine is in asset class $8,$ which has a CCA rate of $20\%.$ The asset class is

expected to remain open at the end of the project. Finally, management expects to make an

initial investment in working capital of $$500,000,$ which will be recovered at the end of the

economic life of the project. The initial investment in working capital is part of the capital

that needs to be raised. Flotation cost to issue new debt is $4\%,$ new preferred share is $5\%,$ and

new common share is $7\%.$ This project will have the same level of risk as the firm.

Based on NPV analysis, should the project be undertaken? Assume that the firm has

$$2,000,000$ in internally generated funds available. $(35$ marks$).$

C$.$ c$)$ Now, assume that the firm has only $$200,000$ in internally generated funds available.

Based on NPV analysis, should the project be undertaken? $(15$ marks$).$