Work Problem in Excel and show formulas.

Part 1

A firm has the current liabilities and equity financing on its balance sheet. The firm has taxable income that puts it in a 38% federal tax bracket, and the state in which it operates levies a 6.5% income tax. Compute the firms weighted average cost of capital.

Source Amount Interest/RoR Proportion

Short-term loan $ 5,000,000 7.5% 0.05

Long-term loan $20,000,000 5.8% 0.25

Retained Earnings $25,000,000 17.0% 0.20

Common stock $50,000,000 22.0% 0.50

Part 2

The same firm is considering the following projects to improve its production process. If the firm has a capital budget of $1,400,000, which projects should be accepted by the rate of return criteria? What is the firms opportunity cost of capital?

Project	First Cost	Annual Benefit	Life (years)
1	$250,000	$50,000	15
2	$300,000	$70,000	10
3	$125,000	$35,000	5
4	$ 50,000	$12,500	10
5	$250,000	$75,000	5
6	$200,000	$32,000	20
7	$400,000	$125,000	5

Part 3

From your estimates of the WACC in part 1 and the opportunity cost of capital in part 2, what do you estimate the firms true MARR to be?