The in$-$class exercise, week $15$ will focus on the following. $1.$ Weighted average cost of capital a$.$ Cost of debt b$.$ Cost of Equity c$.$ Market value weights for debt and equity d$.$ Weighted average of cost of debt and cost of equity $2.$ Capital budgeting a$.$ Marginal cash flows including changes in capital outlay, operating cash flows, ad net working capital. b$.$ Cost of capital $($see #$1$ above$)$ c$.$ Net present value $($accept projects wit positive net present value$).$ d$.$ Internal rate of return $($accept projects with internal rate of return exceeding cost of capital$)$ Examples Inc. ABC has $100,000$ units of debt outstanding; each has $7\%$ coupon rate, $20$ years to maturity, and $$100$ face value.$$ The $30-$day T bill rate is $3\mathrm{.}5\%.$ ABC's debt has $2\mathrm{.}5\%$ maturity risk premium, and $2\%$ default risk premium. ABC is in a $20\%$ tax bracket.$$ Determine ABC's before tax and after tax cost of debt, value of each unit of debt, and the total market value of debt capital. Inc. ABC has $250,000$ shares of common stock outstanding.$$ Common stock has standard deviation of return of $40\%,$ correlation coefficient with S&P$500$ return of $0\mathrm{.}72,$ and S&P$500$ has standard deviation of return of $25\%.$ ABC's stock is expected to pay $$2\mathrm{.}50$ dividend for the next three years and expected to have a price of $$150$ in three years. T$-$bill rate is $3\mathrm{.}5\%$ and return on S&P $500$ is $12\%.$ Determine ABC's cost of equity, value per share, and total market value of equity.$$ Combing info from ABC's debt, determine ABC's weighted average cost of capital. Inc. ABC has an investment opportunity that calls for $$250$ million initial capital outlay.$$ The new investment is expected to increase revenue by $$60$ million a year, reduces expenses by $$10$ million a year, and increases depreciation by $$25$ million a year$$ for the next $10$ years. Determine the marginal cash flows of the investment, its net present value and its internal rate of return.$$ Is this a good investment? Explain. If ABC has the following investments available and has limited capital of $$1,000$ million.$$ Use Excel tool Solver to determine which investments should be taken to maximize value generated. Investment A$,$ capital outlay of $$395$ million, net present value of $$40$ million; Investment B$,$ capital outlay of $$400$ million, net present value of $$45$ million; investment C$,$ capital outlay of $$375$ million, net present value of $$38$ million; investment D$,$ capital outlay of $$200$ million, net present value of $$25$ million.$$