Ragan, Inc. was founded nineteen years ago by brother and sisterCarrington and Genevieve Ragan. The company manufactures andinstalls commercial heating, ventilation, and cooling (HVAC) units.Ragan, Inc. has experienced rapid growth because of a proprietarytechnology that increases the energy efficiency of its units. Thecompany is equally split between the two siblings. The originalpartnership agreement between them gave each 500,000 shares ofstock. The company has since gone public. At that time, thesiblings retained their shares and 1,000,000 shares of new stockwere issued.

The firm anticipates needing to raise a large amount of capital$10 million in the coming year to facilitate further expansion andare evaluating several financing options. The first option is toissue zero-coupon bonds that mature in 20 years. Similarzero-coupon bonds currently have a YTM of 4.5%. The second optionis to issue 4% coupon bonds that mature in 20 years. Similar bondshave a YTM of 4%. The third option is to issue preferred stock witha fixed dividend of $0.85 per share. These preferred stock wouldhave a required return of 7.5%. The firm currently has no preferredstock outstanding. The fourth option is to issue common stock.

The stock is currently trading on the market for $20 per share.The firm most recently paid a dividend on common stock of $0.50 andplans to increase that dividend by 25% per year for the next fiveyears. After that, the firm will level off at the industry averageof 5% per year, indefinitely. Carrington and Genevieve estimate therequired return on the stock to be 15%.

1. What would the shares of preferred stock sell for and howmany would they have to sell? How would this impact the firm’sdividend expenses going forward?

2. Based on the information about the common stock dividends,what should the value of the stock be today?

3. What do you think about the estimate of a 15% requiredreturn? What does the current stock price suggest about therequired return?

Please show all steps. Thank You.