1. the capital structure for mills corporation is shown below.


1. The capital structure for Mills Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,050 for bonds, $20 for preferred stock, and $40 for common stock. Assume a 34% tax rate.


Financing Type

% of Future 



Bonds (8%, $1k par, 16 year   maturity)



Common equity



Preferred stock (5k shares   outstanding, $50 par, $1.50 dividend)



Total %


Compute the company’s WACC.

2. The Milton Company plans to issue preferred stock. Currently, the company’s stock sells for $120. Once new stock is issued, the Milton Company would receive only $99 (due to flotation costs). The dividend rate is 12%, and the par value of the stock is $100. Compute the cost of capital of the stock to your firm. Show all work.

3. The Dayton Corporation is considering a new investment, which would be financed from debt. Dayton could sell new $1k par value bonds at a new price of $950. The bonds would mature in 15 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Dayton for bonds, assuming a 34% tax rate. Show work.

4. Farrah Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%.


Project 1

Project 2


Initial investment




Cash inflow Year 1



Compute the following for each project:

  • NPV (net present value)
  • PI (profitability index) 
  • IRR (internal rate of return)

Which project should be selected? Why?

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