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SBP Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. SBP is in the 40% tax bracket. The
SBP Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. SBP is in the 40% tax bracket. The company has a credit line with a bank up to $10,000,000 at 5% any subsequent amount costs SBP 2% more. SBP's cost of preferred stock is 8% and its cost of internal equity is 12%. The cost of issuing new common stock is 12.8%. The firm has $20,000,000 in change in retained earnings for the current period. You are the financial manager for an engineering firm Three engineers come to you with projects. Adam's project is expected to generate an IRR of 8.75% and costs $10,000,000. Barbara's project is expected to generate an IRR of 10% and costs $20,000,000. Chris project is expected to generate an IRR of 8.25% and costs $30,000,000. Which of the projects should you accept according to the IRR decision method? A) You should accept Barbara's project and Adam s project B) You should accept Barbara's project and Chris' project C) You should accept Adams project and Chris' project D) You should accept all of the projects
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