The interest rate for debt is 10%, price of preferred stock is $4 per share, price of common stock is $4.8 per share. Company pays out dividend $1 per share to common stock and $1.1 to the preferred stock. The expected growth rate is 6%, corporate -and income tax rates are 20% and 25% respectively. Calculate and comment the weighted average cost of capital of the firm.

3a. Compare and contrast the methods of sensitivityanalysis and certainty equivalent briefly.

Investors use both methods to identify risk and potential benefits. The main difference between the two methods is that sensitivity analysis examines the effect of changing only one variable at a time. However, scenario analysis evaluates the effect of changing all inputs at the same time.

In the scenario analysis, the investor creates three possible scenarios:

-Basic case - Refers to an ordinary scenario.

-Worst case - Refers to the most extreme situation that can happen if things do not go as planned.

-Best case - Refers to the best predicted result.

In summary, sensitivity analysis is an estimate of how a given percentage increase in price will lead to a subsequent percentage reduction in the quantity of products sold. Whereas, scenario analysis requires making a few premises about different independent variables and then examining how the outcome has changed.

Scenario analysis predicts future events. It provides information about the external conditions of the company owners that may affect their operations. This, in turn, helps them allocate resources more effectively to avoid negative consequences.

Sensitivity analysis is simply the process of fine-tuning an input and exploring how it affects the overall pattern. In contrast, scenario analysis requires a firm to list all variables and then change the value of each input for different scenarios. For example, a best-case scenario can help predict the outcome when there is a drop in raw material prices, an increase in the number of customers, and favorable exchange rates.

3b. There is an exact mix of equity and debt, at this level market value of the company is maximum. Explain the expression above briefly, once you have identified the related approache.