Part 2: Sara Dylan, recently graduated with a degree in Finance, was offered a job as a treasury analyst in ABS car manufacturer. As she started her job, Sara thought the company's prospects were good. ABS was a mature business that had grown steadily at the expense of its less-well-known competitors. Sara started work on January 2, 2018. The first 2 weeks went smoothly. Then (Sara's manager) Mr. Ward's cost of capital memo assigned her to explain the ABS weighted average cost of capital to other managers. Sara first examined ABS's most recent balance sheet, summarized in Table 1. Then she made the following additional points: Interest rates were charged at the current rate by the lenders, and the long-term debt had just been issued. There is no significant difference between the Book and market values. The preferred stocks had been issued 35 years ago, when interest rates were much lower. Back then, the book value of the preferred stock was 100 per share, but now trading for only 70 per share. The common stock traded for 40 per share. Next year's earnings per share would be about 4 and dividends per share probably 2. (Ten million shares of common stock are outstanding.) ABS had traditionally paid out 50% of earnings as dividends and plowed back the rest. Earnings and dividends had grown steadily at 6% to 7% per year, in line with the company's sustainable growth rate: Table 1. ABS balance sheet, taken from the company's 2017 balance sheet (figures in millions) Working capital Plant and equipment Other assets Notes: Total 200 360 40 600 Bank loan Long-term debt 120 80 Preferred stock 100 Common stock. 300 retained earnings Total 600 1- At year-end 2017, Sea Shore Salt had 10 million common shares outstanding. 2- The company had also issued 1 million preferred shares with book value of 100 per share. Each share receives an annual dividend of 6. ABS's beta had averaged about 0.5, which made sense, Sara thought, for a stable, steady-growth business. Assume the current interest rate of 7% and the market risk premium is 7%. Prepare a presentation to Mr. Ward (Sara's boss); in your presentation, make sure you address the points 1-3. Remember your job is not just finding the right number, you also need to figure out how to explain it all to Mr. Ward and the mangers. 1- Find and explain the relevant cost of equity using the Capital Asset Pricing Model. In your answer, you need to make sure you explain the CAPM, the model's parameters and then interpret the model's output. (20 marks) 2- Compare your calculation with the relevant values provided in Mr. Ward's memo. Is there a difference between your calculations and the values presented in the memo? if yes then make sure you explain to the managers why you ended up with different values. Is there some other way to estimate the cost of equity as a check on the CAPM calculation? Could there be errors in Mr. Ward's calculations? (20 marks) 3- Find and explain the weighted average cost of capital of ABS business. Compare your calculated value with those provided in the memo, and explain the difference if there is any.