1. Gorgeously Gowned Inc. (50 points)

You are trying to estimate the cost of capital for Gorgeously Gowned Inc. You have the following information: Gorgeously Gowned (hereafter GG)s 8% semiannual bonds are currently selling for $748.99 and have 12 years remaining to maturity. The companys 100 par-value 10% (annual dividends) preferred stock price is currently $108.00. The common stock is selling at $80 per share. The last dividend on the common stock was $7.62, and dividends are expected to grow at (a constant rate) of 5 % indefinitely. The firms beta is 2.2, the current T-bill rate is 4%, and the current market risk premium is 5%. For the bond-yield-plus-risk-premium approach, GG uses a 2.64% risk premium. Additionally, if Gorgeously Gowned will issue new common stock, the flotation costs incurred will be 15 percent. The following is the capital structure of GG: 40 percent debt, 10 percent preferred stock, and 50 percent equity. The marginal tax rate of the firm is 30%. Also, GG has $1 million currently in the retained earnings account. Please provide the following, showing all work:

a) Find the component cost of debt and the component cost of preferred stock for GG.

b) GG is considering investing in Project C, a 3-year project with an initial cost of $80 and 3

annual projected cash flows of $30 each, to be received at the end of each year. Calculate Project C s NPV, showing all work.