Nealon Energy Corporation engages in the? acquisition,exploration,? development, and production of natural gas and oil inthe continental United States. The company has grown rapidly overthe last 5 years as it has expanded into horizontal drillingtechniques for the development of the massive deposits of both gasand oil in shale formations. The? company's operations in theHaynesville shale? (located in northwest? Louisiana) have been sosignificant that it needs to construct a natural gas gathering andprocessing center near Bossier? City, Louisiana, at an estimatedcost of ?$80 million. To finance the new? facility, Nealon has ?$20million in profits that it will use to finance a portion of theexpansion and plans to sell a bond issue to raise the remaining?$60 million. The decision to use so much debt financing for theproject was largely due to the argument by company CEO DouglasNealon Sr. that debt financing is relatively cheap relative tocommon stock? (which the firm has used in the? past). Company CFODoug Nealon Jr.? (son of the company? founder) did not object tothe decision to use all debt but pondered the issue of what cost ofcapital to use for the expansion project. There was no doubt thatthe? out-of-pocket cost of financing was equal to the new interestthat must be paid on the debt.? However, the CFO also knew that byusing debt for this project the firm would eventually have to useequity in the future if it wanted to maintain the balance of debtand equity it had in its capital structure and not become overlydependent on borrowed funds. The following balance? sheet, Bonds =30% Common Stock = 70% reflects the mix of capital sources thatNealon has used in the past. Although the percentages would varyover? time, the firm tended to manage its capital structure backtoward these proportions. The firm currently has one issue of bondsoutstanding. The bonds have a par value of ?$1,000 per? bond, carrya coupon rate of 8 ?percent, have 14 years to? maturity, and areselling for ?$1,070. ?Nealon's common stock has a current marketprice of $ 36?, and the firm paid a ?$2.60 dividend last year thatis expected to increase at an annual rate of 6 percent for theforeseeable future. a. What is the yield to maturity for? Nealon'sbonds under current market? conditions? b. What is the cost of newdebt financing to Nealon based on current market prices after bothtaxes? (you may use a marginal tax rate of 34 percent for your?estimate) and flotation costs of ?$30 per bond have been?considered? Note?: Use N= 14 for the number of years until the newbond matures. c. What is the? investor's required rate of returnfor? Nealon's common? stock? If Nealon were to sell new shares ofcommon? stock, it would incur a cost of ?$3.50 per share. What isyour estimate of the cost of new equity financing raised from thesale of common? stock? d. Compute the weighted average cost ofcapital for? Nealon's investment using the weights reflected in theactual financing mix? (that is, ?$20 million in retained earningsand ?$60 million in? bonds). e. Compute the weighted average costof capital for Nealon where the firm maintains its target capitalstructure by reducing its debt offering to 30 percent of the ?$80million in new? capital, or ?$24 ?million, using ?$20 million inretained earnings and raising ?$36 million through a new equityoffering. f. If you were the CFO for the? company, would you preferto use the calculation of the cost of capital in part ?(d?) or?(e?) to evaluate the new? project? Why?