*Question* Refer to the data set: The Company's amount of current debt is:

(a) $220,000,000

(b) $200,000

(c) $200,000,000

(d) $1,100

Please show work, thank you.

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Most recent annual common dividend $4.00

Todays common stock price $50.00

U.S. Treasury 10y annual rate 3 percent

Market risk premium 5 percent

Equity Risk Premium on Bond Yield 10 percent

Number of common shares outstanding 2.5 million

Todays preferred stock price $100.00

Fixed preferred dividend $8.00

Constant growth rate 6 percent

Beta 2.0

Floatation costs for Preferred stock issuance 7 percent

Market price of the bond $1,100.00

Annual coupon on the bond $70.00

Years to bond maturity 5 years

Par value bond $1,000

Number of preferred shares outstanding 200,000

Number of bonds outstanding 200,000

Income Statement (amounts in millions)

Sales $200,000

Variable operating costs (60% of sales) (120,000)

Gross profit 80,000

Fixed operating costs (40,000)

Net operating income (EBIT) 40,000

Interest expense (10,000)

Taxable income 30,000

Taxes (12,000)

Net income $18,000

Company can raise more debt by selling 50,000 new bonds at the same rate (interest) and receiving the market price of the bond i.e. $1,100. The outstanding 200,000 bonds and the additional 50,000 is the maximum the company can raise in debt. After this amount, the average after tax cost of debt will be increased by 1 percent.

In the upcoming annual financial results, the company expects to generate 75 million dollars in retained earnings for the capital budgeting projects. Any requirement of funds beyond this would require issuance of new stock at the market price of $50 per share while maintaining the existing capital structure.

Company has following projects for consideration

Projects Investment Expected MIRR

A $50 million 13 percent

B $60 million 10 percent

C $100 million 8 percent

D $10 million 7.5 percent