Sharp's current capital structure of 60% equity, 35% debt, and 5% preferred stock is considered optimal. This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends. Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6% (all debt over $2 million will cost 11.4% pretax), and sell preferred stock at a cost of 11.5%. Sharp's marginal tax rate is 40%. The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year. Dividends have been growing at an annual compound rate of 8% a year and are expected to continue growing at that rate. New shares can be sold to net the firm $34.50. Sharp has an opportunity to invest in the following capital projects. Which one(s) should be accepted? Project Cost Annual Cash Flow Project Life 1 $3.0 million $552,893 10 years 2 $2.5 million $693,481 5 years 3 $2.0 million $345,220 10 years a. 1 and 2 only b. 1 and 3 only c. 1, 2, and 3 d. Cannot be determined from the information provided
Sharp's current capital structure of 60% equity, 35% debt, and 5% preferred stock is considered optimal. This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends. Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6% (all debt over $2 million will cost 11.4% pretax), and sell preferred stock at a cost of 11.5%. Sharp's marginal tax rate is 40%. The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year. Dividends have been growing at an annual compound rate of 8% a year and are expected to continue growing at that rate. New shares can be sold to net the firm $34.50. Sharp has an opportunity to invest in the following capital projects. Which one(s) should be accepted? Project Cost Annual Cash Flow Project Life 1 $3.0 million $552,893 10 years 2 $2.5 million $693,481 5 years 3 $2.0 million $345,220 10 years a. 1 and 2 only b. 1 and 3 only c. 1, 2, and 3 d. Cannot be determined from the information provided
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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QUESTION 11
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Sharp's current capital structure of 60% equity, 35% debt, and 5%
preferred stock is considered optimal. This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends. Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6% (all debt over $2 million will cost 11.4% pretax), and sell preferred stock at a cost of 11.5%. Sharp's marginal tax rate is 40%. The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year. Dividends have been growing at an annual compound rate of 8% a year and are expected to continue growing at that rate. New shares can be sold to net the firm $34.50. Sharp has an opportunity to invest in the following capital projects. Which one(s) should be accepted?Project
Cost
Annual Cash Flow
Project Life
1
$3.0 million
$552,893
10 years
2
$2.5 million
$693,481
5 years
3
$2.0 million
$345,220
10 years
a. 1 and 2 onlyb. 1 and 3 onlyc. 1, 2, and 3d. Cannot be determined from the information provided
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