You received the following email from Eleanor outlining her requests.

Thank you for agreeing to put together this financial information for us. I've listed the various analyses and kinds of information we are looking for. Please round all dividends to three decimal places and share prices to two decimal places.

1. We would like an estimate of our current market price per share for our common shares. For this, use the following assumptions (6 marks):

At the end of 20X3, Bio-Fuel Generation Inc. (BFG) will pay a dividend of $0.75, which increases by 8% in 20X4 and 6% in 20X5.

Thereafter, the constant growth rate will be 3%.

The current date is January 1, 20X3.

2. What is the company's weighted average cost of capital using its current capital structure? The current yield on the long-term debt is 7.5%. (3 marks)

3. Operating risk, business risk, and financial risk associated with BFG were often mentioned in our discussions with Trinity Venture Capitalists (Trinity). We would like to have a better understanding of each of these types of risk and how they relate to BFG. (6 marks)

4. As you know, we are looking to commercialize the production of biodiesel from algae. We require $2,000,000 for capital investment in the building and equipment. We have two proposals for financing this project: either by issuing preferred shares or by issuing a loan. Describe the implications on current and future cash flows and net earnings for each option. (6.5 marks)

5. Using the CPA Way, describe qualitative factors that should be considered for each of these proposals and make a recommendation as to which proposal should be accepted. (9 marks)

6. As a first step in preparing the capital budget for the algae project, we need to understand what sunk costs and opportunity costs are. Based on the assumptions provided, are there any sunk costs or opportunity

CASE:

Bio-Fuels Generation Incorporated (BFG) is a private company that produces biomass-based diesel fuel from feedstocks, including inedible corn oil, used cooking oil, and inedible animal fats. The diesel fuel is then sold to distributors.

The company is also actively involved in research into the production of other types of biomass-based fuels. Recently, the research team had a breakthrough and discovered a new production process that will produce fuel from algae at a relatively low production cost. The benefits of using algae as a feedstock for fuel production have long been known and include the fact that algae can be grown in large quantities in wastewater and can be genetically manipulated to produce many different types of fuel. But the main disadvantage to commercialization has been that algae production requires large amounts of water, nitrogen, and phosphorous, resulting in higher greenhouse gas emissions to produce algae than is saved by using it as a fuel, in addition to very high production costs. However, the BFG research team has recently discovered a process that will significantly reduce the amount of these inputs required, resulting in a very cost-effective production process.

BFG is owned by Eleanor Whiteman, a renowned scientist in the research of biomass-based fuels, and her husband, Michael Whiteman. Eleanor owns 300,000 common shares and Michael owns 100,000 common shares. Currently, the company has three directors on its board Eleanor, Michael, and Sherry LePage, a long-time friend. Sherry has a PhD in Biology, specializing in algae, and teaches at the local university. With her background and experience, Sherry advises on the research conducted at the firm. She is very interested in this project of using algae to produce fuel.

Eleanor is very excited about the research results because this has been her area of research for the past 20 years. BFG now needs financing to commercialize this algae production process. Michael is also excited about the company expanding into this area but has some concerns regarding how the financing should be raised and other finance issues affecting the company.

You currently work as a financial analyst for HRY Consultants Inc. BFG has hired your company in the past to assist with a variety of financial issues. Yesterday, Eleanor called you, asking about work she would like completed.

The following appendixes provide additional information about BFG and its financial position:

Appendix I 20X1 and 20X2 financial statements

Appendix II Current capital structure and financing proposals

Appendix III Assumptions for the capital budget analysis

See attachments for appendix: