# The analyst will reject the project since the

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do you expect this analyst to make regarding the investment?
c. Explain why the decisions in parts a and b may not be in the best interests of thefirm’s investors.d. If the firm maintains a capital structure containing 40% debt and 60% equity,find its weighted average cost using the data in the table.
e. If both analysts had used the weighted average cost calculated in part d, what recommendationswould they have made regarding the North and South facilities?
f. Compare and contrast the analyst’s initial recommendations with your findingsin part e. Which decision method seems more appropriate? Explain why.
P9–2 Cost of debt using both methods Currently, Warren Industries can sell 15-year,\$1,000-par-value bonds paying annual interest at a 12% coupon rate. As a resultof current interest rates, the bonds can be sold for \$1,010 each; flotation costs of\$30 per bond will be incurred in this process. The firm is in the 40% tax bracket.a. Find the net proceeds from sale of the bond, Nd.980b. Show the cash flows from the firm’s point of view over the maturity of the bond.
c. Calculate the before-tax and after-tax costs of debt.
d. Use the approximation formula to estimate the before-tax and after-tax costs of debt.
e. Compare and contrast the costs of debt calculated in parts c and d. Which approachdo you prefer? Why?
P9–17 Calculation of individual costs and WACC Dillon Labs has asked its financial managerto measure the cost of each specific type of capital as well as the weighted averagecost of capital. The weighted average cost is to be measured by using the followingweights: 40% long-term debt, 10% preferred stock, and 50% common stock equity(retained earnings, new common stock, or both). The firm’s tax rate is 40%.Debt The firm can sell for \$980 a 10-year, \$1,000-par-value bond paying annualinterest at a 10% coupon rate. A flotation cost of 3% of the par value is requiredin addition to the discount of \$20 per bond.Preferred stock Eight percent (annual dividend) preferred stock having a parvalue of \$100 can be sold for \$65. An additional fee of \$2 per share must be paidto the underwriters.Common stock The firm’s common stock is currently selling for \$50 per share.The dividend expected to be paid at the end of the coming year (2016) is \$4. Itsdividend payments, which have been approximately 60% of earnings per share ineach of the past 5 years, were as shown in the following table.YearDividend20153.7520143.520133.320123.1520112.85It is expected that to attract buyers, new common stock must be underpriced\$5 per share, and the firm must also pay \$3 per share in flotation costs. Dividendpayments are expected to continue at 60% of earnings. (Assume that rr = rs.)a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock.
d. Calculate the WACC for Dillon Labs.
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