You are a financial analyst for the East Texas Manufacturing Company (ETMC). ETMC is studying the possibility of expanding its operations and is considering two mutually exclusive approaches for doing so. Alternative requires a smaller investment in plant and equipment with a significant workforce expansion Alternative Bentails a larger investment in plant and sophisticated technology, but due to automation requires less workforce expansion ETMC invested $200,000 in a feasibility study for this expansion, and its executives are somewhat confident that there is a significant market for its expansion, but there is clearly risk involved. Given the lower level of fixed costs of Alternative A, you have determined that this project has 10% less risk than an average project for ETMC. In contrast given the higher fixed costs of Alternative B. you have determined that it is 20% more risky than an average project for ETMO. Currently, ETMC's capital structure is as follows: Component Long-term Debt Description $1000 par, 9% coupon bonds with 16 years until maturity 10,000 bonds outstanding Current market price of $1050.00 Your investment bankers estimate that, at your investors current required rate of return, new bonds could be sold at par minus 5% flotation costs. $100 par, 11% dividend preferred stock currently selling for $310.00 16,000 shares outstanding Preferred Stock Your investment bankers estimate that ETMC could issue new preferred stock at parat your investors' current required rate of return, but with a $2 per share discount and $3.75 per share flotation costs Common Stock 200,000 outstanding shares, with a book value of 546 per share and a $68.00 current market price per share. Dividend history shown below Your investment bankers estimate that you could issue additional common stock shares with $2 per share underpricing and with flotation costs of $5.00 per share. Year 2020 2019 2018 2017 Dividend $3.95 $3.76 $3.58 $3.41 $3.25 2016 Year 2020 2019 2018 2017 2016 Dividend $3.95 $3.76 $3258 $3.41 53.25 Currently, the rate of return for the stock market is 9.9% and the risk-fronte i 4.7%. ETMC'S corporate betais. ETMC is in the percentax bracket ETMC uses a 4year decision rule for the payback period Investment ETMC does not expand it can sell the proposed expansion site for $500,000 Alternative Arequires an additional plant, equipment, and technology of 52,200,000. The plant, equipment, and technology are classified as MACRS 5-year property. The useful life of the equipment, however, is 7 years at the conclusion of the 7-year period, it is estimated that the salvage value will be $250,000 Under Alternative A, inventaries will increase by $140,000, accounts receivable will increase by $135,000, and accounts payable will increase by $80,000 Alternative requires an additional plant, equipment, and technology of 56,100,000. The plant, equipment, and technology are classified as MACRS 5-year property. The useful life of the equipment, however, is 7 years, at the conclusion of the 7-year period, it is estimated that the salvage value will be $360,000 Under Alternative B, inventories will increase by $180,000, accounts receivable will increase by $150,000, and accounts payable will increase by $85,000 Revenues and Expenses The following chart shows the expected revenues and operating costs for each project for each year. Alternative A Alte Year Revenue Operating Revenue Operating Costs Costs 2021 $1,100,000 $510,000 $1,700,000 $380,000 2022 $1,200,000 $530,000 $1875,000 $390,000 2023 $1,300,000 $560.000 51975,000 $400,000 2024 $1,350,000 $570,000 $2,075,000 $410,000 2025 $1,250,000 $585,000 $2,150,000 $420,000 2026 $1,150,000 $595,000 $2,000,000 $420,000 2027 $1,050,000 $600,000 $1,800,000 $425,000 Other Information Other Information In determining weights for the capital structure, you know that a market value, target-weights capital structure is best. But when you asked the CFO what the target weights were, he said, "we don't know." So, you'll just have to do the next best thing rather than the best thing In your finance courses at the university, you learned that the cost of equity can be estimated using Gordon's Model or the CAPM. Do these two approaches come up with the same result? If not, which should you use for your analysis, and why? You have the information you need to use either non-risk-adjusted or risk-adjusted rates. Which should you use for your analysis, and why? You know that the required rate of return on retained earnings (r) is less than the required rate of return on newly issued common stock ('nes). Your analysis of the financial condition of the firm, however, indicates that there is not sufficient cash being generated from retained earnings to finance either of these projects. Your Assignment With the information you have gathered, conduct a capital budgeting analysis using each of the appropriate decision rules. The company's top management will want to see your justification for your analysis, so you will need to show your work and explain your analysis and findings