5. (10 points) The common stock of XYZ Corporation is currently worth $40 million, and its risk-free debt is currently worth $60 million. The estimated market risk premium is 10%, and the common stock of the corporation has a beta of 0.8. What is the firm's cost of capital if the Treasury bill rate is 6%? (Assume no taxes.)

7. (10 points) The Solar Calculator Company plans to invest \$5 million into a new factory that makes calculators. \$2 million is spent annually on fixed costs. A solar calculator is produced for \$5 per unit and sells for \$20. What is the yearly sales level at which the factory will break even (i.e., NPV = 0) if it operates for three years and the cost of capital is 12 percent? (Assume that income and expenses occur at the year's end. Assume no taxes.) 8. (15 points) Petroleum Inc. (PI) controls off-shore oil leases. It is considering the construction of a deep-sea oil rig at a cost of \$500 million. The price of oil is \$100/bbl. and extraction costs are \$50/bbl. PI expects costs to remain constant. The rig will produce an estimated 1,200,000 bbl. per year forever. The risk-free rate is 10 percent per year, which is also the cost of capital. (Ignore taxes). Suppose that oil prices are uncertain and are equally likely to be \$120/bbl. or \$80/bbl. next year. Suppose that PI has the option to postpone the project by one year. Calculate the value of the real option to postpone the project for one year.

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