Directions: Please show all appropriate steps on each problem.
Problem 3: Your firm's capital structure consists of 30% debt, 60% common stock, and preferred stock. The firm is planning to issue new debt to fund a project. The debt is priced at $1,010 per bond and pays interest semi-annually. The bonds have ten years to maturity and pay an 8% coupon rate. The bonds have a $1,000 par. Goldman Sachs will charge the firm 8% to prepare the bond issuance. The firm has a beta of 1.78, and the S&P return is currently 6%. Treasury bills currently yield 1.45%. The firm's preferred stock pays a perpetual preferred dividend of $3, and the preferred stock is currently trading at $40 per share. The firm is in the 32% tax bracket.
A. What is the firm's weighted average cost of capital?
B. The firm is looking at three mutually exclusive projects. Project A has an expected return of 9%. Project B has an expected return of 12%. Project C has an expected return of 15%. Which project(s) should the firm choose and why?
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