Cost of capital for the project

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Reference no: EM132234954

Gateway Inc. has a corporate cost of capital of 11.5 percent. Its target capital structure is 55 percent equity and 45 percent debt. The before-tax cost of debt is 9 percent, and thecompany's tax rate is 30 percent. If the expected dividend next period (D1) and current stockprice are $5 and $45, respectively, I need the company's growth rate. Please show work.

Gateway just paid $10 million for a feasibility study. If the company goes ahead with theproject, it must immediately spend another $100 million now, and then spend $20 million in oneyear. In two years, it will receive $80 million, and in three years it will receive $90 million.  If the cost of capital for the project is 11 percent, I need the project's NPV and IRR. Please show work.

Gateway uses a cost of capital of 12 percentto evaluate average-risk projects, and it adds or subtracts 2 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Bothhave a cost of $200,000 and will last four years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $71,104. Project B, of less than average risk, will produce cash flows of $146,411 at the end of Years 3 and 4 only. I need to know which project should Gateway accept. Please show work.

Reference no: EM132234954

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