**Assignment 3 ****Tinker Bell**

The assignment is to be solved either individually or in groups of two students. Each group should submit its original work on Canvas, before 11am on **Wednesday, November 20th, 2013**.

Two files are required:

- An
**Excel spreadsheet**(LastName1andLastName2A3.xlsx) showing your work. Please make sure your formulas are verifiable. - A
**Word file**(LastName1andLastName2A3.docx) taking the form of a report. Please explain your calculations.

If there are two students in a group, only one student should make a submission. However, the submitted files should show both students’ full names and IDs.

**Tinker Bell**

Tinker Bell is an IT company. Its managers want to invest in a new project to update the computer system. The initial investment of this project is 2 million dollars.

Tinker Bell uses the weighted average cost of capital to determine the required rate of return for its investment projects. But, since this project is less risky than its usual projects, managers want to subtract 2% from the firm’s required rate of return.

Here are a few details about the firm’s capital structure as well as the financing that will be used for the new project:

There are presently 100,000 common shares trading on the market at a price of $10. These shares have a beta of 1.5. The market risk premium is 5% annually and the expected market return right now is 8%.

Tinker Bell presently has two types of bonds trading on the market:

- 1000 zero coupon bonds with a $1,000 face value and a 5 year maturity. They currently trade at $690.

- 300 bonds that pay semi-annual coupons of $30 with a 6 year maturity and a 7.5% nominal yield to maturity.

The marginal tax rate of the company is 35%.

What annual rate of return (EAR) should Tinker Bell require for this new project?

Subject | Business |

Due By (Pacific Time) | 11/20/2013 11:00 am |

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