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PROBLEM 1:

Johnston Industries finances its projects with 35% debt, 10% preferred stock and 55% common stock.

The company can issue bonds at a YTM of 8.6%.

The cost of preferred stock is 9%.

The company's common stock currently sells for $45.43 per share.

The current dividend just paid is $3.00 (D0) and is expected to grow at 6%per year indefinitely. Calculate the cost of equity using the dividend growth model.

Beta of stock is 1.25; Risk-free rate is 3% and market rate of return is 11%;

calculate the cost of equity using CAPM. (Overall cost of common equity is the average of the above two calculations using the dividend growth model and CAPM)) The company's tax rate is 25%. What is the company's WACC using the cost equity, cost of debt and cost of preferred stock calculated from the above narrative ?

PROBLEM 2: Given the following data for two independent projects: Project A and Project B: (a) Calculate the NPV of the two projects. (b) Calculate the IRR of the two projects (c) Indicate your accept/Reject decisions for each project (d) What would be your decision if the projects were mutually exclusive projects. [Note: Use NPV for decision regarding mutually exclusive projects as IRR is not applicable for such projects]

Year Project A Project B

0 (220,000) (220,000) 1 27,500 96,500 2 37,500 72,800 3 75,000 55,000 4 84,600 32,700 5 99,500 30,000 WACC = 11.5%