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Ace Products Company is a growing manufacturer of automobile accessories whose stock is actively traded on the over-the-counter (OTC) market. During 2009, the Dallas-based company experienced sharp increases in both sales and earnings. Because of this recent growth, Kaka, the company`s treasurer, wants to make sure that available funds are being used to their fullest. Management policy is to maintain the current capital structure proportions of 30% long-term debt, 10% preferred stock, and 60% common stock equity for at least the next 3 years. The firm is in the 40% tax bracket.
Ace`s division and product managers have presented several competing investment opportunities to Jen. However, because funds are limited, choices of which projects to accept must be made. The investment opportunities schedule (IOS) is shown below.
Investment Opportunities Schedule (IOS) for Star Products Company
Investment Opportunity Internal rate of return (IRR) Initial investment
C 25% 700,000
D 23% 400,000
B 22% 200,000
F 19% 600,000
E 17% 500,000
A 15% $400,000
G 14% 500,000 To estimate the firm`s weighted average cost of capital (WACC), Kaka contacted a leading investment banking firm, which provided the financing cost data shown in the following table. Financing Cost Data Ace Products Company
Long-term debt: The firm can raise $450,000 of additional debt by selling 15-year, $1,000- par-value, 9% coupon interest rate bonds that pay annual interest. It expects to net $960 per bond after flotation costs. Any debt in excess of $450,000 will have a before-tax cost, rd, of
13%.

Preferred stock: Preferred stock, regardless of the amount sold, can be issued with