The stock of Gao Computing sells for $50, and last years dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. Gaos preferred stock pays a dividend of $3.30 per share, and new preferred stock could be sold at a price to net the company $30 per share. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. The firm can issue additional long-term debt at an interest rate (or a before-tax cost) of 10%, and its marginal tax rate is 25%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gaos beta is 0.83. In its cost-of-capital calculations, Gao uses a target capital structure with 30% debt, 10% preferred stock, and 60% common equity.

Current Common Price = $50, Common Stock Dividend Last Year (D0) = $2.1, Common Stock Dividend Growth Rate = 7%, Flotation cost to issue new common stock = 10%, Net issuing price of preferred stock = $45, Preferred stock dividend = $3.30, Before-tax cost of debt = 10%, Tax rate = 25%, Gao's beta = 0.83, Risk-free rate = 6.5%, Market risk premium = 6.0%, Target capital structure from debt = 30%, Target capital structure from preferred stock = 10%, Target capital structure from common stock = 60%

PLEASE SHOW FORMULA BEFORE USE PUT NUMBERS IN, and DO NOT COPY AND PAST FROM OTHER QUESTIONS BECAUSE THIS QUESTIONS HAVE DIFFERENT NUMBERS!!!

61 e. Suppose Gao is evaluating three projects with the following characteristics: 62 63 (1) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred 64 stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for 65 the project. All equity will come from reinvested earnings. 66 (2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%. 67 (3) Equity invested in Project B would have a beta of 1.0. The project has an expected return of 10.0%. 68 (4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%. 69 70 Analyze the company's situation by estimating rs for each beta and the resulting WACCs below. Expected return on project ps WACC 71 72 Project A 73 Project B 74 Project C Beta 0.5 1.0 2.0