Cost of Capital, Build a Model Build a Model FIN 565 Project SPREADSGEET PROBLEM (9-18)Chapter 9 Build a Model:WACC 1. Inputs for WACC Estimation (6 points) Identify the values for the inputs....

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Cost of Capital, Build a Model Build a Model FIN 565 Project SPREADSGEET PROBLEM (9-18)Chapter 9 Build a Model:WACC 1. Inputs for WACC Estimation (6 points) Identify the values for the inputs. InputsValues Current common stock price Common stock dividend last year (D0) Common stock dividend growth rate Flotation cost to issue new common stock Net issuing price of preferred stock Preferred stock dividend Before-tax cost of debt Tax rategiven in clarification Gao's beta Risk-free rate Market risk premium Target capital structure from debtgiven in clarification Target capital structure from preferred stockgiven in clarification Target capital structure from common stockgiven in clarification 2. WACC Estimation a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (considering flotation costs), and the cost of equity (ignoring flotation costs). Use both the DCF method and the CAPM method to find the cost of equity. Cost of debt (after-tax) (rdT) (4 points) Cost of preferred stock (considering flotation costs) (rps) (4 points) Cost of common equity by the DCF approach (ignoring flotation costs) (rs) (4 points) Cost of common equity by the CAPM (rs) (4 points) b. Calculate the cost of new stock using the DCF model (re). (4 points) c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method and add that difference to the CAPM value for rs.) (4 points) d. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company's WACC? For the cost of common equity, use the result from the DCF approach. (4 points) e. Suppose Gao is evaluating three projects with the following characteristics: (1) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for the project. All equity will come from reinvested earnings. (2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%. (3) Equity invested in Project B would have a beta of 1.0. The project has an expected return of 10.0%. (4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%. Analyze the company’s situation by estimating rs for each beta and the resulting WACCs below. (12 points) BetarsrpsrdTWACCExpected return on project Project A0.5 Project B1.0 Project C2.0 3. Capital Budgeting Decisions f. For each project, state whether the project should be accepted or should be rejected. Explain why each project should be accepted or rejected. (4 points)