based on the information provided 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 UCLA Medical School at the time; O'Brien specinlized 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 rescarch, 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 success - 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 garner significant grant funds, as well as perform as a subcontractor to 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 Engineering Division. Although the two divisions are boused in the same buildings, the equipment they use and their personnel are quite different. Indoed, 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 openations 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 AIDS 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 research 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 have 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-todiy 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 researeh, and then count on the skills of the research teams - and good tuck - 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 furm, 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 her 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 Northwestem University finance professor. Table 1 Silicon Valley Medieal Technologies, Iac. Balance Shect For the Year Ended Deceraber 31, 2009 (In Millions of Dollars) To begin, Owens reviewed SIVMED's 2009 balance sheet, which is shown in Table 1. Next, she assembled the following data: (I) STMEED's tong-term debt consists of 9.5% coupons, semiannual payment bonds with fifteen years remaining to maturity. The bonds last traded at a price of $1129.50 per $1,000 par value bond. The bonds are not callable, and they are rated BBB. (2) The founders have an aversion to short-term debt, so the firm uses such debt only to fund cyclical working capital needs. (3) SIVMED's federal-plus-state tax rate is 40%. (4) The company's preferred stock pays a dividend of $1.80 per quarter, it has a par value of $100; it is noncallable and perpetual and it is traded in the over-the-counter market at a current price of $104.00 per share. A flotation cost of $2.00 per share would be required on a new issue of preferred. (Although not planned at this time the company is interested in how the analysis would change if the preferred stock had a mandatory redemption provision, which specified that the firm must redeem the issue in 5 years at a price of $100 per share.) (5) The firm's last dividend (D0) was $1.09, and dividends are expected to grow at about an 8% rate in the foresecable future. Some analysis expect the company's recent growth rate to continue, others expect it to go to zero as new competition eaters the market, but the majority anticipate that a growth nate of about 8% will continue indefinitely. (6) An important minority of anatysts have noted that over the last few years, the company has had a 14% average retum on equify ( ROE ) and has paid out about 40% of its net income as dividends