Question 3: Sommer, Inc., is considering a project that will result in initial after-tax cash savings of $1.89 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .80, a cost of equity of 12.9 percent, and an after-tax cost of debt of 5.7 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an Please turn over Page 1 of 2 Continued From Overleaf adjustment factor of 1 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? Question 4: (8 Marks) Ying Import has several bond issues outstanding, each making semi-annual interest payments. The bonds are listed in the following table. Coupon Bond Price Quote Maturity Face Value Rate 1 6.1 % 106.06 5 years $ 41,000,000 2 7.6 114.62 8 years 36,000,000 3 7.3 113.17 15.5 years 56,000,000 4 6.9 102.41 25 years 63,000,000 If the corporate tax rate is 21 percent, what is the after-tax cost of the company's debt? (6 Marks) Question 5: Utech Inc. is a startup company which must reinvest in itself heavily in the near future. Specifically, Utech can only afford to pay a dividend every three years for the next nine years. The company plans to pay a dividend of $9 three years from today. The dividend in year six is expected to be 173% of the dividend paid in year three. The dividend in year nine is expected to be 137% of the dividend paid in year six. Dividends are expected to grow at a constant rate 4% thereafter. Find the value of the stock today if you require a 13% rate of return?