Question 1
The RRR for Company ABC for both Preferred stock and for bonds is 8%. Assuming that the firm will finance its operations with a 30% preferred stock issuance and a 70% bond issuance, what is Company ABC's weighted average cost of capital.
Question 2
An investment firm purchases a large parcel of land for 3 million dollars. It makes no improvements to the land and collects no receipts for the land (no rent).
In 5 years the firm anticipates that they will sell the land for 4 million dollars. The firm is in the 35% marginal tax bracket and has a WACC of 5%.
If you were the CFO of this company would you purchase the land based on your understanding of Net Present Value (NPV).
Calculate your answer using and labelling the appropriate variables and please breifly explain your answer in one or two paragraphs.