Mars Car company has capital structure made up for 40% debt and 60% equity and a

Question

Mars Car company has capital structure made up for 40% debt and 60% equity and a tax rate of 30%. A new issue of $1,000 par bonds maturity in 20 years can be issued with a coupon of 9% at a price of 41,098.18 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 Mars Co. is expected to grow at a 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

Explanation / Answer

d) Projects 1 and 2

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