HighTech Inc. was found by Roger Mortimer last year. The company is developing a new technology that may enance significantly the speed of the internet. There has been a debate in the norard of directors about the alternative source to finance R&D investments ($5,000,000). And its impact on the market price of High Tech Inc. The CEO was reluctant to issue new shares and suggested the company issue long term bonds instead The company is expecting a supernormal growth rate while it exploits its technological and marketing lead. Dividends are expected to rise by 5 percent. The company has just paid dividneds of $1.5 per share. The Risk free rate of interest is 4 percent and the risk premium har been 5 percent. HighTeh Inc, is in a highet systematic risk clss than the average market index and, therefore, has a beta of 1,2. The company has recently issued 8 percent coupon bonds and preferred shares both with par value of $100. The coupon bond s mature in 5 years and the competitive market interest rate on similar bonds is 12 percent (Investors required rate of return on bonds). However, the preferred shares are expected to offer fixed 8 percent dividends. a. Calculate the intrinsic value of the ordinary (common) and preferred shares of High Tech. (Hint: use CAPM to calculate investor required rate of return for the common stock] b. Calculate the market prices of the bonds. c. Explain to the board of directors of HighTech your support (or not) to the CEO proposal (based on the attractiveness to investors and the risk associated with each investment option). i. B I PE US 1