Gulf Electric Company (GEC)

question 65

Multiple Choice

Gulf Electric Company (GEC)
Gulf Electric Company (GEC) uses only debt and equity in its capital structure. It can borrow unlimited amounts at an interest rate of 10 percent so long as it finances at its target capital structure, which calls for 55 percent debt and 45 percent common equity. Its last dividend was $2.20; its expected constant growth rate is 6 percent; its stock sells on the NYSE at a price of $35; and new stock would net the company $30 per share after flotation costs. GEC's tax rate is 40 percent, and it expects to have $100 million of retained earnings this year. GEC has two projects available: Project A has a cost of $200 million and a rate of return of 13 percent, while Project B has a cost of $125 million and a rate of return of 10 percent. All of the company's potential projects are equally risky.
-Refer to Gulf Electric Company.What is GEC's cost of equity from newly issued stock?

• A) 13.77%
• B) 12.66%
• C) 13.33%
• D) 12.29%
• E) 10.00%

---

Definitions:

MiFi

A portable broadband device that allows multiple end users and mobile devices to share a 3G or 4G mobile broadband Internet connection and create an ad-hoc network.

Bluetooth

A wireless technology standard for exchanging data over short distances from fixed and mobile devices, enabling the creation of personal area networks.

Peer-to-peer

A network architecture where all participants have equal privileges and communicate directly with each other, bypassing centralized servers.

5G Mobile Networks

The fifth generation of mobile networks, offering faster speeds, lower latency, and the ability to connect more devices simultaneously.