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Graph the internal rates of retun on investment projects against the marginal cost of capital for the following 6 projects. Which projects should be selected? Use Excel.

Project	Cost (M)	IRR
1	$ 7,000,000.00	8.73%
2	$ 7,000,000.00	8.40%
3	$ 8,000,000.00	9.60%
4	$ 5,000,000.00	9.14%
5	$ 5,000,000.00	8.20%
6	$ 8,000,000.00	8.18%

EXHIBIT 1

Wyoming Energy Development, Inc.

\Balance SheetFor Year Ending April 30, 1991.A

ssets1991

Cash$9,000.000

Accounts receivable31,000.000

Inventories12,000.000

Total current assets$52,000.000

Net fixed assets193,000.000

Goodwill7,000.000

Total assets$252,000.000

Liabilities and EquityAccounts payable$850.000

Current debt10,000.000

Accrued taxes1,150.000

Total current liabilities$12,000.000

Long-term debt72,000.000

Preferred stock43,000,000

Common stock114,000.000

Retained earnings11,000.000

Total liabilities and equity$ 252,000.000

To determine a weighted average cost of capital for WED, it was necessary for LindaBellich to examine the costs associated with each source of funding used. In the past, thelargest sources of funding had been the issuance of new common stock and internallygenerated funds. Through conversationswith the comptroller and other members of theboard of directors, Bellich learned that the firm, in fact, wished to maintain its currentfinancialstructure since it is in accordance with the book value weights shown in Exhibit I.She further determined that the strong growth patterns that WED had exhibited over thepast 10 years were expected to continue indefinitely because of the dwindling supply ofU.S. and Japanese domestic oil and the growing importance of, and U.S. and Japanesedependence on, coal and other alternative energy resources. Through further investigation,Bellich learned that WED could issue additional shares of common stock, which had a parvalue of $25 per share and were selling at a current market price of $45. The expecteddividend for the next period would be $2 pershare,withexpectedgrowthatarateof6 percent per year for the foreseeable future. The underwriting commission paid to WEDsinvestment banker would amount to$2 per share and would be for insuring the issue againstthe risk of adverse market fluctuations in the stocks selling price during the distributionprocess, in addition to performing the function of actually selling the security and providingadvice as to the timing and pricing of the issue

Preferred stock at 6 percent also could be issued with the help of an investment banker at$97 per share with a par value of $100 per share. Of this $97, 3.1 percent would go to theinvestment banker for his help in marketing the issue, with the remainder of the funds goingto WED.

Finally, Bellich learned that it would be possible for WED to raise an additional $1 millionthrough a one-year loan from WEDs Chicago bank at 9 percent. Any amount raised over$1 million would cost WED 14 percent., Short-term debt has always been used byWyoming to finance capital expenditures, and as WED grows, it is expected to maintain itsproportion in the capital structure to support capital expansion. Also, $6 million could beraised through a bond issue with 30 years maturity with a 10 percent coupon at 98 percentof face value. On this issue, 2 percent of the face value would be charged as anunderwriting commission. If it became necessary to raise more funds via long-termdebt,$3 million more could be accumulated through the issuance of additional 30 year bondssold at 95 percent of face value,withthecouponratebeingraisedto11percentand2 percent of the face value being charged as an underwriting commission. While anyadditional funds raised via long-term debt would necessarily have a 30-year maturity with a14 percent coupon yield and be sold at 95 percent of face value, 2 percent of this face valuewould be charged as an underwriting fee. Here again, this fee would go to the investmentbanker for hishelp in marketing the issue.

In the past, WED has calculated a weighted average of these sources of funds to determineits cost of capital. In discussions with the current comptroller, the point was raised thatwhile this served as an appropriate calculation for externally generated funds, it did not takeinto account the fact that much of the funds used for capital expenditures by WED wereinternally generated. For example, WED is expected to produce $5 million in depreciation-generated funds in addition to retaining $4 million of its earnings during the coming period.The comptroller agreed that there should be some cost associated with retained earningsfinancing incorporated into the calculations, but depreciation charges should not beincluded since they, as opposed to all other financing methods, do not appear on theliability side of the balance sheet. Although Bellich was not completely convinced by thecomptrollers logic, she continued with her work

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