Question
A company uses only debt and equity in its capital structure. It can borrow unlimited amounts at an interest rate of 12% as long as
A company uses only debt and equity in its capital structure. It can borrow unlimited amounts at an interest rate of 12% as long as it finances at its target capital structure, which calls for 60% debt and 40% common equity. Its last dividend was $1.00 and expected dividend for the coming year is $1.06. Earnings and dividend is expected to grow at a constant growth rate for the foreseeable future. Its stock sells for $7.80; and issuance of new stock will cost the company $0.90 per share. Expected net income for the coming year is $612,000. The tax rate is 40% and there are 200,000 shares issued and outstanding. Investment opportunities available are the following: Project Investment ($) Returns (%) A 300,000 13.00 B 250,000 12.50 C 350,000 13.50 D 200,000 14.00 E 400,000 12.00 Which project/s, if any, should Wey Hu Sye Company select and what is the total investment for the coming year? [Explain your answer based on the Weighted Marginal Cost of Capital and Investment Opportunity Schedules].
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