Answered in excel with formulas please

B D E F G 5 INPUTS USED IN THE MODEL 6 7 Po $50.00 8 Net Ppf $30.00 9 Dpf $3.30 10 DO $2.10 11 g 7% 12 B-T ra 10% 13 Skye's beta 0.83 14 Market risk premium, RPM 6.0% 15 Risk free rate, IRF 6.5% 16 Target capital structure from debt 45% 17 Target capital structure from preferred stock 5% 18 Target capital structure from common stock 50% 19 Tax rate 35% 20 Flotation cost for common 10% 21 22 a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the the CAPM method and the 23 dividend growth approach to find the cost of equity. 24 25 Cost of debt: 26 27 B-T ra (1 -T) A-Tra 28 29 30 Cost of preferred stock (including flotation costs): 31 32 Dpf 1 rpf 33 34 35 Cost of common equity, dividend growth approach (ignoring flotation costs): 36 37 D 1 Po g rs 38 39 40 Cost of common equity, CAPM: 41 42 TRE + b * RPM rs 43 44 45 46 IMPORTANT NOTE: HERE THE CAPM AND THE DIVIDEND GROWTH METHODS PRODUCE APPROXIMATELY THE 47 SAME COST OF EQUITY. THAT OCCURRED BECAUSE WE USED A BETA IN THE PROBLEM THAT FORCED THE SAME 48 RESULT. ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS. X Net Ppf + B D E F G H + 66 Wd 67 Wpf + 50 b. Calculate the cost of new stock using the dividend growth approach. 51 52 D. * (1 + g) / Pox (1 - F) + g re 53 54 55 c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as 56 determined by the dividend growth approach and add that differential to the CAPM value for rs.) 57 58 Differential re 59 60 61 Again, we would not normally find that the CAPM and dividend growth methods yield identical results. 62 63 d. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the 64 company's WACC? 65 45.0% 5.0% 68 W 50.0% 69 100.0% 70 71 Wo * A-T rd + Wpf * ipf Ws * rs WACC 72 73 74 e. Suppose Gao is evaluating three projects with the following characteristics: 75 76 (1) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred 77 stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for 78 the project. All equity will come from reinvested earnings. 79 80 (2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%. 81 82 (3) Equity invested in Project B would have a beta of 1.0. The project has an expected return of 10.0%. 83 84 (4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%. 85 86 Analyze the company's situation and explain why each project should be accepted or rejected. 87 Expected return on 88 Beta rs Tos ra(1 - T) WACC project 89 Project A 0.5 90 Project B 1.0 91 Project C 2.0 92 93 The expected returns on Projects A and B both exceed their risk-adjusted WACCs, so they should be accepted. However, 94 Project C's WACC exceeds its expected rate of return, so it should be rejected