Business, 17.04.2020 20:42 Jasmine3864

Valley Flights, Inc. has a capital structure made up of 40% debt and 60% equity and a tax rate of 30%. A new issue of $1,000 par bonds maturing in 20 years can be issued with a coupon of 9% at a price of $1,098.18 with no flotation costs. The firm has no internal equity available for investment at this time, but can issue new common stock at a price of $45. The next expected dividend on the stock is $2.70. The dividend for the firm is expected to grow at constant annual rate of 5% per year indefinitely. Flotation costs on new equity will be $7.00 per share. The company has the following independent investment projects available:

Project Initial Outlay IRR

1. $100,000 10%
2. $10,000 8.5%
3. $50,000 12.5%

Which of the above projects should the company take on?

A. Project 3 only
B. Projects 1, 2 and 3
C. Projects 1 and 3
D. Projects 1 and 2

Answers: 1

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Valley Flights, Inc. has a capital structure made up of 40% debt and 60% equity and a tax rate of 30...