a. The Gamma Products Corporation has the following capital structure, which it considers optimal: Bonds, 7% (now selling at par) $ 300,000 Preferred stock, $5.00 240,000 Common stock 360,000 Retained Earnings 300,000 $1,200,000 Dividends on common stock are currently $3 per share and are expected to grow at a constant rate of 6 percent. Market price share of common stock is $40, and the preferred stock is selling at $50. Flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The company's tax rate is 40 percent. Required: i Calculate the cost of each component of the capital structure (i.e. after tax cost of debt, preferred stock, retained earings, and the new common stock.) ii. The weighted average cost of capital including all components costs. b. Abbot is a well known company in the pharmaceutical industry. Based on the monthly data for last four years, January 2016 to December 2020, its beta appears equal to 1.75. During this period, the company has deployed an average debt to equity ratio of a around 40 percent in its capital structure. Looking at the challenges being posed by new patent regime, the company has realized the need for making more investment in research and development activities. For meetings its funding requirement, the company is planning to raise additional funds from the market. The CFO of the company is exploring the option 2 of raising the debt level to 60 percent. However, he is concerned that a raising additional debt may increase the risk proposition of the company, as measured by beta. Calculate the beta of the firm at 50 percent and 60 percent debt level and comment upon the increase in the risk level. c. The following price and cost data are given for Firm A and B: Firm A Firm B Selling price per unit $ 2 $ 2.5 Variable cost per unit $1.70 $ 1.00 Fixed operating costs $ 6,000 S 62.500 Interest $10000 ner var $17500 ner vear pofs