You are the financial manager of C&C Ltd and make use of weighted average cost of capital (WACC) to evaluate a potential project for further expansion. C&C Ltd. will pay a $0.8 per share dividend next year. The company pledges to increase its dividend by 4% per year, indefinitely. The current market of common stock is $25. The current market prices of preferred stocks and zero coupon bonds are $125 and $525 respectively. The company is subject to the corporation tax rate of 25 percent. The following information is extracted from the company's balance sheet this year. Long term liabilities: $'000 Zero coupon bonds payable due in 15 years, $1,000 par value, 3,600 bonds issued 3,600 and outstanding $'000 Shareholders' equity: 8% preferred stocks, $100 par value, 4,000 shares authorized, 3,000 shares issued and outstanding 300 Common stocks, $5 par value, 300,000 shares authorized, 200,000 shares issued and outstanding 1,000 Retained earnings 300 REQUIRED a) Calculate cost of common stock, preferred stock and after-tax cost of bond. Calculate the company's weighted average cost of capital (WACC), b) Question 2 (15 marks) Part I Consider the following information: State of Economy Rate of Return if State Occurs Stock J Stock K Stock L Boom Good Poor Bust Probability of State of Economy 0.3 0.40 0.25 0.05 0.22 0.14 0.05 -0.13 0.5 0.4 -0.15 -0.35 0.24 0.18 -0.08 -0.12 REQUIRED a) If your portfolio is invested 30 percent each in stock K and L and 40 percent in stock J. What is the expected return of portfolio? b) What is the variance and standard deviation of this portfolio? Part II Jack Hui is evaluating the performance of IU stock and stock market index considering the expected return, beta and standard deviation. The risk-free rate is 3.5%. Stock Expected Return Beta Standard Deviation 13.5% 1.3 7% Market 10.5% 1.0 5% REQUIRED Based on Capital Asset Pricing Model (CAPM), will you recommend to buy or sell the IU stock Illustrate with calculations on the differences between the expected return and the CAPM required return of IU stock to conclude your answer within 20 words