Which projects should it invest?

Far Out Tech (FOT) has a debt ratio of 0.3 and it considers this to be its optimal capital structure. FOT has no preferred stock. FOT has analyzed four capital projects for the coming year as follows:

ProjectNet InvestmentIRR
1$3,000,00013.5%
2$1,500,00018.0%
3$2,000,00012.6%
4$1,600,00016.0%

FOT expects to earn $2.7 million after tax next year and pay out $700,000 in dividends. Dividends are expected to be $1.05 a share during the coming year and are expected to grow at a constant rate of 10 percent a year for the foreseeable future. The current market price of FOT stock is $22 and up to $2 million in new equity can be raised for a flotation cost of 10 percent. If more than $2 million is sold then the flotation cost will be 15 percent. Up to $2 million in debt can be sold at par with a coupon rate of 10 percent. Any debt over $2 million will carry a 12 percent coupon rate and be sold at par. If FOT has a marginal tax rate of 40 percent, in which projects should it invest?
a.1, 2, 3, & 4
b.2
c.1, 2, and 4
d.2 and 4

D.2&4

Tags

　　Seed Capital 　　Return Investment 　　Real Money 　　Real Estate Investment 　　Raise Capital 　　Property Investment 　　Profitable Investments 　　Private Investment

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