7. For this question, consider the extended version of the Fisher Equation (R = R* + IP + LP + MRP + DRP) as the required rate of return on the stock. Oscar Papa Corps dividend is currently $1.75 and is expected to grow by constant 4.00% each year. The required rate of return (i.e., the rate on alternative investments) is 10.4%. As part of this required rate of return, analysts believe that Oscar Papa has a default risk premium of 2.7% (i.e., this is included in the required rate of return of 10.4%). (a) Calculate the estimated value of Oscar Papas stock. (b) Now, assume that the economy enters a recession and Oscar Papa is impacted negatively. Analysts now believe that Oscar Papas probability of default has doubled, causing the DRP to double. All else equal, recalculate the estimated value of Oscar Papas stock with this additional probability of default included.

8. Quebec Sierra Corp. is considering investing in one of two projects. Project A requires an initial outlay of $10 million and generates a constant income stream of $2 million dollars at the end of each of the next ten years. Quebec Sierra will finance Project A with a mix of debt and equity as follows: 30% debt and 70% equity. For Project A the cost of debt is 4.6% and the cost of equity is 8.0%. Assume that Project A has no residual or salvage value at the end of 10 years. Project B requires an initial outlay of $8 million and generates a constant income stream of $3 million dollars at the end of each of the next five years. Quebec Sierra will finance Project B with a mix of debt and equity as follows: 40% debt and 60% equity. For Project B the cost of debt is 6.5% and the cost of equity is 9.0%. Assume that Project B has no residual or salvage value at the end of 5 years. Based on this information, which project should Quebec Sierra choose?