Part 1 –
Your boss is back with a two partial models. The first partial model you boss needs you to look at is for the stock of Gao Computing sells for $50, and last year’s dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. Gao’spreferred 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 35%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao’s beta is 0.83. In its cost-of-capital calculations, Gao uses a target capital structure with 45% debt, 5% preferred stock, and 50% common equity.
Part 2 –
The second model is for a project for Gardial Fisheries. Gardial Fisheries is considering two mutually exclusive investments. The projects’ expected net cash flows are as follows: Expected Net Cash Flows for the 7 year Project are:
Project A −$375, −300, −200, −100, 600, 600, 926 and, −200
Project B −$575, 190, 190, 190, 190, 190, 190 and, 0
Please find attached document to be filled out for your boss.
Scoring Rubric –
Levels of Achievement
Models were estimated with great accuracy, using Excel and provided relevant outputs in an excel file
Models were estimated with moderate accuracy, using Excel and provided relevant outputs in an excel file
Models were estimated with inaccuracy, using Excel and provided relevant outputs in an excel file
Model estimations are mostly incorrect, or no model was provided
Interpretations are provided with great accuracy by addressing all the required questions, and minimum words requirement is met
Interpretations are provided with moderate accuracy by addressing most of all required questions, and minimum words requirement is met
Interpretations are provided with many errors, and, some of important questions were not answered. Minimum words requirement is not met.
Interpretations are mostly incorrect, or no interpretation was provided.