please answer 5,6,7 and 8 only

CASE ANALYSIS: The Case of the Junior Analyst Name: Max was recently hired by Imagine Software Inc. as a junior budget analyst. He is working for the Venture Capital Division and has been given for capital budgeting projects to evaluate. He must give his analysis and recommendation to the capital budgeting committee. Max has a B.S. in accounting from CWU (2015) and passed the CPA exam (2017). He has been in public accounting for several years. During that time he earned an MBA from Seattle U. He would like to be the CFO of a company someday--maybe Imagine Software Inc. - and this is an opportunity to get onto that career track and to prove his ability. As Max looks over the financial data collected, he is trying to make sense of it all. He already has the most difficult part of the analysis complete - the estimation of cash flows. Through some internet research and application of finance theory, he has also determined the firm's beta. Here is the information that Max has accumulated so far: The Capital Budgeting Projects He must choose one of the four capital budgeting projects listed below: Table 1 Table 1 A B C D 0 (14,900,000)(17,900,000)(16,600,000)(19,700,000) 124,980,0004,980,0005,990,0006,210,0003,850,0004,990,0006,400,0005,880,000 344,510,0004,510,0006,250,0004,700,0006,860,0004,990,0006,800,0006,650,000 Risk High Average Low Average Table 1 shows the expected after-tax operatin Table 1 shows the expected after-tax operating cash flows for each project. All projects are expected to have a 4 year life. The projects differ in size (the cost of the initial investment), and their cash flow patterns are different. They also differ in risk as indicated in the above table. The capital budget is $20 million and the projects are mutually exclusive. Capital Structures Imagine Software Inc. has the following capital structure, which is considered to be optimal: Cost of Capital Max knows that in order to evaluate the projects he will have to determine the cost of capital for each of them. He has been given the following data, which he believes will be relevant to his task. (1)The firm's tax rate is 40%, (2) Imagine Software Inc. has issued a 9% semi-annual coupon bond with a 7 years term to maturity. The current trading price is $988. (3) The firm has issued some preferred stock which pays an annual 8.5% dividend of $100 par value, and the current market price is $94. (4) The firm's stock is currently selling for $76.5 per share. Its last dividend (D0) was $2.80, and dividends are expected to grow at a constant rate of 7.5%. The current risk free return offered by Treasury security is 3.1%, and the market portfolio's return is 10%. Imagine Software Inc. has a beta of 1.25. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 2.8%. (5) The firm adjusts its project WACC for risk by adding 2% to the overall WACC for high-risk projects and subtracting 2% for low-risk projects. Max knows that Imagine Software Inc. executives have favored IRR in the past for making their capital budgeting decisions. His professor at Seattle U. said NPV was better than IRR. His textbook says that MIRR is also better than IRR. He is the new kid on the block and must be prepared to defend his recommendations. First, however, Max must finish the analysis and write his report. To help begin, he has formulated the following questions: 1. What is the firm's cost of debt? 1. What is the firm's cost of debt? Solution: As per given data, Tax rate of the firm 40% Coupon rate of bond 9% Cost of debt = Coupon rate of the bond (1-tax rate) =9%(10.4) =9%(0.6) =5.40% So, cost of debt is 5.40% 2. What is the cost of preferred stock for Imagine Software Inc.? Dividend = annual 8.5% of $100 par value =$8.5 Cost of Preferred stock = Dividend/ current market price =$8.5/$94=9.04% So, Cost of Preferred stock is 9.04% Cost of common equity (1) What is the estimated cost of common equity using the CAPM approach?| Cost of common equity (1) What is the estimated cost of common equity using the CAPM approach? The current risk free return offered by Treasury security is 3.1%, and the market portfolio's return is 10%. Imagine Software Inc. has a beta of 1.25 . Costofequity=Riskfreereturn+Beta(Marketreturn-riskfreereturn)=3.1%+1.25(10%3.1%)=3.1%+1.25(6.9)=3.1%+8.625%=11.725% Estimated cost of common equity using the CAPM approach is 11.725% (2) What is the estimated cost of common equity using the DCF approach? The firm's stock is currently selling for $76.5 per share. Its last dividend (D0) was $2.80, and dividends are expected to grow at a constant rate of 7.5%. So D1 Dividend for next year will be $3.01($2.81.075). (2) What is the estimated cost of common equity using the DCF approach? The firm's stock is currently selling for $76.5 per share. Its last dividend (DO) was $2.80, and dividends are expected to grow at a constant rate of 7.5%. So D1 Dividend for next year will be $3.01($2.81.075). Cost of equity =(D1/ current market price )+ Growth rate =(3.01/76.5)+7.5%=3.93%+7.5%=11.43% So the estimated cost of common equity using the DCF approach is 11.43% (3) What is the estimated cost of common equity using the bond-yield-plus-risk-premium approach? (3) What is the estimated cost of common equity using the bond-yield-plus-risk-premium approach? Semi-annualYieldtomaturity=Couponpayment+2(Facevalue+Price)Numberofyears(Facevalue-Price) ($1000$988)14$90+($1000+$988)2$97.5+0.8572$994==0.0914or9.14% Annual yield to maturity is 9.142=18.28%. Risk premium is 2.8% Now, calculate the cost of equity. BYPRP = Yield to maturity Risk premium =18.28%+2.8%=21.08% (4) What is the final estimate for rs? Average of cost of common equity: 311.725%+11.23%+21.08% =14.68% Therefore, the final cost of equity is 14.68%. Therefore, the final cost of equity is 14.68%. 5. What is Imagine Software Inc.'s overall WACC? 6. Do you think the firm should use the single overall WACC as the hurdle rate for each of its projects? Explain. 7. What is the WACC for each project? Place your numerical solutions in Table 2. 8. Calculate all relevant capital budgeting measures for each project, and place your numerical solutions in Table 2. 6. Do you think the firm should use the single overall WACC as the hurdle rate for each of its projects? Explain. 7. What is the WACC for each project? Place your numerical solutions in Table 2. 8. Calculate all relevant capital budgeting measures for each project, and place your numerical solutions in Table 2. Table 2 A B C D WACC NPV IRR MIRR 10. Comment on the commonly used capital budgeting measures. What is the underlying cause of ranking conflicts? Which criterion is the best one, and why