1. A large corporation has $80 million worth of bonds outstanding, and $160 million worth of common stock. Pre-tax cost of debt is 8.5 percent. The stock has a beta of 1.1. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 8 percent. The corporate tax rate is 35 percent. What is the company’s weighted average cost of capital ?
2. Gamma Electronics is considering the purchase of testing equipment that will cost $436,000 to replace old equipment. Assume the new equipment will generate before-tax savings of $380,000 per year over the four years. The new equipment will result in additonal depreciation of $51,000 per year. If the cost of capital is 17% and the tax rate is 30%, what is the NPV of the project.