1. Calculate the weighted-average cost of capital (WACC) for Federated Junkyards of America, using the following information:
- Debt: $75,000,000 book value outstanding. The debt is trading at 90% of book value. The yield to maturity is 9%.
- Equity: 2,500,000 shares selling at $42 per share. Assume the expected rate of return on Federated's stock is 18%.
- Taxes: Federated's marginal tax rate is Tc = .35.
2. A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project's APV in the following cases?
a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.