Question 1 (36 Marks) Part 1 The capital structure of a company with relevant market information are shown as below: Common stock: There are 55 million shares outstanding of S10 par. The stock has a beta coefficient of 1.8. The management of the company just paid an annual dividend of S1.5 per share and the market expects that the dividend growth rate to be 20 percent for coming three years and grow by 5 percent per year thereafter in the foreseeable future. The required rate of return on your company's stock is 15 percent. Preferred stock: 12 million shares currently selling at $96 per share, with dividend rate of 6 percent and face value of S100. Debt: Three years ago, the company issued 9 million 15-years 8% semi-annual coupon bonds with par value of $1,000 that are still outstanding. The yield-to-maturity (in terms of an effective rate of return) on the bond is 16% per annum. Market: The current Treasury bill yields 3 percent and the expected return on the market is 12 percent. The company is in the 40% corporate tax bracket, Required: (a) Estimate the current common stock value using the Dividend Growth Model (10 marks) (b) Calculate the bond price today. (answers in a whole dollar amount (7 marks) (e) Based on answers in above (a) and (b), determine the company's capital structure weights (WE, WP, WD) for equities and debt. (answers in % (6 marks) (d) Compute the cost of equity (Re) using CAPM, cost of preferred stock (Rp), and pre-tax cost of debt (Ro). (answers in % (6 marks) (e) Assuming that the company is going to maintain the current capital structure, calculate the weighted average cost of capital (WACC) of the company. (answer in % (2 marks) Part II Rainbow Company is using both debt and equity financing. Its target capital structure is to achieve 30 percent debt and 70% equity. Early this year, the company invested in project A that provided an IRR of 7 percent. This project was financed by debt costing 5 percent. Later on, the company also found similar project that had an IRR return of 12 percent. The Chief Financial Officer, however, commented that project B was not acceptable because it would require the issuance of common stock at a higher cost of 14 percent. Discuss whether the CFO is using cost of capital" approach in evaluating the company's investment. Do you agree with the CFO's project evaluation decision? Explain. (within