Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

ABC Inc. has a debt ratio of 0.45 and it considers this to be its optimal capital structure. ABC has no preferred stock. ABC 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%

ABC expects to earn $2.5 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.15 a share during the coming year and are expected to grow at a constant rate of 8 percent a year for the foreseeable future. The current market price of ABC stock is $23 and up to $2 million in new equity can be raised for a flotation cost of 10 percent. If more than $2 million is sold then the flotation cost will be 15 percent. Up to $2 million in debt can be sold at par with a coupon rate of 10 percent. Any debt over $2 million will carry a 12 percent coupon rate and be sold at par. If ABC has a marginal tax rate of 40 percent, in which projects should it invest and what is ABC's optimal capital budget? (Please draw MCC and IOS curves when answering this problem.)

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M944794

Have any Question? 


Related Questions in Basic Finance

Govt exam review1be prepared to give two examples of

GOVT Exam Review 1. Be prepared to give two examples of Internal Validity problems AND two examples of External Validity problems that can cause inaccurate or biased results in public opinion polls. 2. Be able to explain ...

What is meant by break even drivers identify two important

What is meant by break even drivers? Identify two important drivers affecting the amount of revenues needed for ventures to break even Explain

How do you explain the highly politicized nature of share

How do you explain the highly politicized nature of share issue privatization (SIP) pricing and share allocation policies? Are governments maximizing offering proceeds, or are they pursuing primarily political and econom ...

1 based on the following information construct a

1. Based on the following information, construct a traditional financial institution balance sheet AND a balance sheet including off-balance sheet items. Market value of assets = 200                                      ...

What is the relation between a companys operating risk and

What is the relation between a company's operating risk and its optimal capital structure? What is meant by the pecking order theory of capital structure? What are the implications of the Modigliani-Miller theory of capi ...

If you receive 15000 today and can invest it at a 5 annual

If you receive $15,000 today and can invest it at a 5% annual rate compounded continuously, what will be your ending value after 20 years?

Ethan is investing 50 every month for 20 years the annual

Ethan is investing $50 every month for 20 years. The annual rate is 6%. How much money will Ethan have in 20 years? An investment promises to pay $3,000 yearly for 10 years. The payments are received at the beginning of ...

1nbspcalculate the cost of new common equity financing of

1. Calculate the cost of new common equity financing of stock R using Gordon Model Round the answers to two decimal places in percentage form (Write the percentage sign in the "units" box) Last Year Dividend Growth Rate ...

1 what information is contained in each of the

1. What information is contained in each of the supplementary sections of the research report? 2. How are the levels of the headings of a research report determined? 3. Summarize the writing and stylistic goals that can ...

1 according to readygov what are the three basic steps

1. According to Ready.Gov, what are the three basic steps people can take to prepare for any type of disaster? 2. What are the seven key elements that can be used to measure the comprehensive nature of an evacuation plan ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen