based on the information, please answer the following questions

Cost of Capital Silicon Valley Medical Technologies (SIVMED) was founded in San Jose, California, in 1992 by Kelly O'Brien, David Roberts, and Barbara Smalley, O'Brien and Roberts, both MDs, were on the research faculty at the UCL.A Medical School at the time; O'Brien specialined in biochemistry and molecular biology, and Roberts specialized in immunology and medial microbiology. Smalley, who has a PhD, served as the department chair of the Microbiology Department at UC-Berkeley. The company started as a research and development firm, which performed its own basic research, obtained patents on promising technologies, and then either sold or licensed the technologies to other firms which marketed the products. In recent years, however, the firm has also contracted to perform research and testing for larger genetic engineering and biotechnology firms, and for the U.S. government. Since its inception, the company has enjoyed enormous suceess - even its founders were surprised at the scientific breakthroughs made and the demand for its services. One event that contributed significantly to the firms' rapid growth was the AIDS epidemic. Both the U.S. government and private foundations have spent billions of dollars in AIDS research, and SIVMED had the right combination of skills to gamer significant grant funds, as well as perform as a subcontractofio other firms receiving AIDS research grants. The founders were relatively wealthy individuals when they started the company, and they had enough confidence in the business to commit most of their own funds to the new venture. Still, the capital requirements brought on by extremely rapid growth soon exhausted their personal funds, so they were forced to raise capital from outside sources. First, in 2001, the firm borrowed beavily, and then in 2003 when it used up its conventional debt capacity, it issued $15 million of preferred stock. Finally, in 2006 . the firm had an initial public offering (IPO) which raised \$50 million of common equity. Currently, the stock trades in the over-the-counter market, and it has been selling at about $30 per share, SIVMED is widely recognized as the leader in an emerging growth industry, and it won an award in 2008 for being one of the 100 best-managed small companies in the United States. The company is organized into two divisions: (1) the Clinical Research Division and (2) the Genetic Engincering Division. Although the two divisions are housed in the same buildings, the equipment they use and their personnel are quite different. Indeed, there are few synergies between the two divisions. The most important sypergies lay in the general overhead and marketing areas. Personnel, payroll, and similar functions are all done at the corporate level, while technical operations at the divisions are completely separate. The Clinical Research Division conducts most of the firm's AIDS research. Since most of the grants and contracts associated with ADS research are long-term in nature, and since billions of new dollars will likely be spent in this area, the business risk of this division is low. Conversely, the Genetic Engineering Division works mostly on in-house research and short-term contracts where the funding. duration, and payoffs are very uncertain. A line of researeh may look good initially, but it is not unusual to hit some snag, which precludes further exploration. Because of the uncertainties inherent in genetic research, the Genetic Engineering Division is judged to bave high business risk. The founders are still active in the business, but they no longer work 70-hour weeks. Increasingly. they are enjoying the fruits of their past labors, and they have let professional managers take over day-to. day operations. They are all on the board of directors, though, and David Roberts is chairman. Although the firm's growth has been phenomenal, it has been more random than planned. The founders would simply decide on new avenues of research, and then count on the skills of the research teams - and good luck - to produce commercial successes. Formal decision structures were almost. nonexistent, but the company's head start and its bright, energetic founders easily overcame any deficiencies in its managerial decision process. Recently, however, competition has become stiffer, and such large biotechnology firms as Genentech, Amgen, and even Bristol-Myers Squibb have begun to recognize the opportunities in SIVMED's research lines. Because of this increasing competition, SIVMED's founders and board of directors have concluded that the firm must apply state-of-the-art techniques in its managerial processes as well as in its technological processes. As a first step, the board directed the financial vice president, Gary Hayes, to develop an estimate for the firm's cost of capital and to use this number in capital budgeting decision. Hayes, in turn, directed SIVMED's treasurer, Julie Owens, to have a cost of capital estimate on his desk in one week. Owens has an accounting background, and ber primary task since taking over as treasurer has been to deal with the banks. Thus, she is somewhat apprehensive about this new assignment, especially since one of the board members is a well-known Northwestern University finance professor. Table 1 Silicon Valley Medieal Technologies, Inc. Balance Sheet For the Year Ended December 31, 2009 (In Millions of Dollars) 9. Answer the following questions regarding the marginal cost of capital schedule. a. Construct SIVMED's marginal cost of capital (MCC) schedule. How large could the company's capital budget be before it is forced to sell new common stock? Would the MCC schedule remain constant beyond the retained earnings break point, no matter how much new capital it raised? Explain, Again, ignore deprecation. 10. Should the corporate cost of capital as developed above be use by both division, and for all projects within each division? If not, what type of adjustment should be made? 11. Answer the following questions regarding weights of capital items. a. What are SIVMED's book value weighs of debt, preferred stock, and common stock? (Hint: Consider only long-term sources of capital. Based on the balance sheet numbers and Figure 9-1 can be used as reference) b. What are SIVMED's market value weighs of debt, preferred stock, and common stock? (Hint: Figure 9-I can be used as reference) c. Should book value or market value weights be used when calculating the firm's weighted average cost of capital? Why