1.The following information obtained from EAST AFRICA HOLDINGS financial data base. At the end of 2016 the company free cash flow is $40 million. And this will continue for unlimited period of time with zero growth rates. At this time the company capital source was the existing common stock holders. The unleveraged beta of the industry is 1.20. But with deep analysis of the industry the finance sub team convinced the requirement of outside source to sustain a business. Therefore if the company determines to procure capital from debt and to leverage the industry what is the optimum capital structure of the industry? given:

a.The experts projected cost of debt is 7%.

b.Stock free risk rate of the industry was 6.5% and the market risk premium considered was 5%.

c.marginal tax is 40%

Hit: consider 10/90, 40/60 and 50/50 percent debt /equity ratio as possible optimum capital structure options.

2.Assume the following five facts exist and determine the price of stock of EAST AFRICA HOLDINGS. Use Cost of stock from question number one that resulted optimum capital structure. This rate is used to discount the cash flows. N years of supernormal growth 3. Growth rate of dividends during the supernormal growth period 30%. This rate is shown directly on the time line. (Note: The growth rate during the supernormal growth period could vary from year to year. Also, there could be several different supernormal growth periods, e.g., 30% for three years, then 20% for three years, and then a constant 8%.). Do last dividend the company paid was $2.15.