Case 5

1. PNC clearly have 2 types of bonds outstanding, after calculating the yields of each bond, it is safe to advise that the company should call bond B. this is because, the yield to call is lower than the yield to maturity. The yield shows that company is stable. However, if the company chooses or decides to sell preferred stocks to raise its funds and capital, then PNC should consider selling sinking fund, this because it has the lowest cost over the years. Issuing new stock will cause the number of outstanding common stocks to increase. This might cause depreciation in the stock prices. The flotation cost will increase too, causing the cost of equity to adjust to balance with the number of shares issued.

2. WACC= weight of preferred equity * cost of preferred equity + weight of common equity * cost of common equity + weight of debt * cost of debt * (1-taz x rate)
WACC= 10.38%. The WACC could be used as a measure to assess projects.

3. A company should accept a project if and when the return on the project is higher than the company’s WACC. Based on the information, projects A-F should be accepted.

4. The riskier the projects, the higher the cost of capital. So the company should alter the WACC for weighing projects that are different in terms of risk.

5. The market value capital structure seems consistent with the target capital structure, however the market weights of the debt and preferred stock and the target weights are different. Because of the difference, the weights determine the cost of capital. If the business sells more bonds, the WACC will decline, but if the company sells more common stock, the WACC will increase. In this case, the actual ratio of debt is lower than that of the target structure, so the business will issue more bonds until they achieve its desirable