The Gulf Power Company is an electric utility planning to build a new power-generating plant of conventional design. The company has traditionally paid out all earnings to the stockholders as dividends and financed capital expenditures with new issues of common stock. There is no debt or preferred stock presently outstanding. Data on the company and the new power plant follow. Assume all earnings streams are perpetuities that are constant.Company Data Current annual earnings: $27 million Number of outstanding shares: 10 million New Power Plant Initial outlay: $20 million Added annual earnings: $3 million Management estimates the rate of return currently required by stockholders to be 10 percent per year and considers the power plant to have the same risk as existing assets. Assume there are no taxes, no costs of bankruptcy, and perfect capital markets.

a. What will be the total market value of Gulf Power if common stock is issued to finance the plant?

b. What will be the total value (stocks plus bonds) of the firm if $20 million in bonds at an interest rate of 8 percent is issued to finance the plant, assuming the bonds are perpetuities?

c. Given that bonds will be issued as in (b), calculate the rate of return required by stockholders after the financing has occurred and the plant has been built.