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Question 3 25 Points a) Danielle & Company Limited (DCL), based in Clarendon, has the following capital structure: debt is 37%, preferred stock is 24% and common stock is 39%. Their tax rate is 35% and investors expect earnings to grow at a constant rate of 3.5% into the future. DCL is expected to pay a dividend of $4.80 per share and the stock currently sells for $46 per share. The following terms apply to new security offerings Preferred: New preferred stock can be sold to the public at a price of $73.50 per share, with a dividend of $8.50, and would incur a flotation cost of 10%. Debt: DCL lenders require a return of 12% per annum. Common: Common stock will only be raised via retained earnings. () Calculate the cost of each capital structure component (9 marks) (i) Determine the weighted average cost of capital for DCL. (6 marks) b) Explain how the cost of capital would be impacted by each of the following: (1). increasing the proportion of common equity and reducing the proportion of debt. (2 marks) (i1) an increase in the tax rate. (2 marks) c) Fuller & Fuller Limited (FFL) has the following capital structure: 18% debt and 82% common stock. Their weighted average cost of capital is 12% and the applicable tax rate is 4096. FFL has the following independent investment opportunities that are basic average risk projects for the firm. Indicate, with reasons, which projects FFL should accept/reject. Project Initial Cost Expected Rate of Return .. A $15,000 11.5% B $10,000 12.5% C $20,000 13.0% (6 marks) 176 minutes remaining