1. New England Singers has 500,000 common shares outstanding that are priced at $36.00 per share and have an expected return of 14.64% and an expected real return of 14.38%. The company also has 400,000 shares of preferred stock outstanding that are priced at $25.00 per share and have an expected return of 12.56% and an expected real return of 12.30%. Finally, the company has 10,000 bonds outstanding with a coupon rate of 7.69%, current yield of 6.41%, yield-to-maturity of 9.24%, face value of $1,000, and price of $1,200. The expected return on the market is 12.11%, the risk free rate is 3.78%, and the tax rate is 30%. What is the weighted average cost of capital for New England Singers?
A. 11.48% (plus or minus 0.05%age points)
B. 11.67% (plus or minus 0.05%age points)
C. 11.07% (plus or minus 0.05%age points)
D. 11.34% (plus or minus 0.05%age points)
E. None of the above is within 0.05%age points of the correct answer
2. A number of companies, including New England Singers and Lyric Bank, are considering undertaking project A, which is believed by all to have a level of risk that is equal to that of the average-risk project at New England Singers. Project A is a 3-year project that would require an initial investment of $65,000 and then produce expected cash flows of $30,000 in 1 year, $25,000 in 2 years, and $20,000 in 3 years. Project A has an internal rate of return of 8.080 percent. The weighted-average cost of capital for New England Singers is 9.156 percent and the weighted-average cost of capital for Lyric Bank is 7.389 percent. Which one of the following assertions about project A is true if managers want to maximize value?
A. New England Singers should pursue the project and Lyric Bank should pursue the project
B. New England Singers should pursue the project and Lyric Bank should not pursue the project
C. New England Singers should not pursue the project and Lyric Bank should pursue the project
D. New England Singers should not pursue the project and Lyric Bank should not pursue the project E. Either New England Singers or Lyric Bank or both should be indifferent about pursuing the project