which one is correct answer please confirm? Q22: Far Out Tech (FOT) has a debt ratio of 0.3, and it considers this to be its optimal capital structure. FOT has no preferred stock. FOT has analyzed four capital projects for the coming year as follows: Project Net Investment IRR 1 $3,000,000 13.5% 2 $1,500,000 18.0% 3 $2,000,000 12.6% 4 $1,600,000 16.0% FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10% a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a flotation cost of 10%. If more than $2 million is sold then the flotation cost will be 15%. Up to $2 million in debt can be sold at par with a coupon rate of 10%. Any debt over $2 million will carry a 12% coupon rate and be sold at par. If FOT has a marginal tax rate of 40%, in which projects should it invest? a. 1, 2, and 4 only b. 1, 2, 3, and 4 c. 2 only d. 2 and 4 only
which one is correct answer please confirm? Q22: Far Out Tech (FOT) has a debt ratio of 0.3, and it considers this to be its optimal capital structure. FOT has no preferred stock. FOT has analyzed four capital projects for the coming year as follows: Project Net Investment IRR 1 $3,000,000 13.5% 2 $1,500,000 18.0% 3 $2,000,000 12.6% 4 $1,600,000 16.0% FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10% a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a flotation cost of 10%. If more than $2 million is sold then the flotation cost will be 15%. Up to $2 million in debt can be sold at par with a coupon rate of 10%. Any debt over $2 million will carry a 12% coupon rate and be sold at par. If FOT has a marginal tax rate of 40%, in which projects should it invest? a. 1, 2, and 4 only b. 1, 2, 3, and 4 c. 2 only d. 2 and 4 only
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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which one is correct answer please confirm?
Q22: Far Out Tech (FOT) has a debt ratio of 0.3, and it considers this to be its optimal capital structure. FOT has no preferred stock . FOT has analyzed four capital projects for the coming year as follows:
|
Project |
Net Investment |
|
|
1 |
$3,000,000 |
13.5% |
|
2 |
$1,500,000 |
18.0% |
|
3 |
$2,000,000 |
12.6% |
|
4 |
$1,600,000 |
16.0% |
FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10% a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a flotation cost of 10%. If more than $2 million is sold then the flotation cost will be 15%. Up to $2 million in debt can be sold at par with a coupon rate of 10%. Any debt over $2 million will carry a 12% coupon rate and be sold at par. If FOT has a marginal tax rate of 40%, in which projects should it invest?
| a. |
1, 2, and 4 only
|
|
| b. |
1, 2, 3, and 4
|
|
| c. |
2 only
|
|
| d. |
2 and 4 only
|
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