Question: PROBLEM #3 (20 points): W.B. Jones Heating & Air has an equity value of $4 billion and a total asset value of $5 billion. They

PROBLEM #3 (20 points):

W.B. Jones Heating & Air has an equity value of $4 billion and a total asset value of $5 billion. They are currently examining the risk and return characteristics of two potential mutually exclusive expansion projects and want to know if either is financially viable for the company. Project A is anticipated to produce a 7.65% return while project B is expected to produce a 8.44% return. They have no preferred stock outstanding and their tax rate is 35%.

A. (10 points) Historically, the company has had a beta of 1.25. If the market return is 7%, what is the cost of equity for the firm?

B. (10 points) If W.B. Jones 8% annual coupon bonds are currently selling for $1,200, what is the cost of debt for the firm? Assume the bonds are 20 year bonds with 15 years left until maturity.

C. What is the WACC for the firm? Should they accept either, both, or neither project(s)?

Assume any ideal risk free rate

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