Part 1 –
Your boss is back with a two partial models. The first partial model you boss needs you to look at is for the stock ofGaoComputing sells for $50 and last years dividend was $2.10. A flotation cost of 10% would be required to issue new common stock.Gaospreferred stock pays a dividend of $3.30 per share andnewpreferred stock could be sold at a price to net the company $30 per share. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. The firm can issue additional long-term debt at an interest rate (or a before-tax cost) of 10% and its marginal tax rate is 35%. The market risk premium is 6% the risk-free rate is 6.5% andGaosbeta is 0.83. In its cost-of-capital calculationsGaouses a target capital structure with 45% debt 5% preferred stock and 50% common equity.
Part 2 –
The second model isfora project forGardialFisheries.GardialFisheriesis considering two mutually exclusive investments. The projects expected net cash flows are as follows: Expected Net Cash Flows for the 7yearProject are:
Project A $375 300 200 100 600 600 926 and 200
Project B $575 190 190 190 190 190 190 and 0
Please find attached document to be filled out for your boss.
Scoring Rubric –