Tapley Inc

question 55

Multiple Choice

Tapley Inc.'s current (target) capital structure has a target debt ratio (D/TA) of 60 percent.The firm can raise up to $5 million in new debt at a before-tax cost of 8 percent.If more debt is required, the initial cost will be 8.5 percent,
And if more than $10 million of debt is required, the cost will be 9 percent.Net income for the previous year was $10 million, and it is expected to increase by 10 percent this year.The firm expects to maintain its dividend payout ratio
Of 40 percent on the 1 million shares of common stock outstanding.If it must sell new common stock, it would encounter a 10 percent flotation cost on the first $2 million, a 15 percent cost if more than $2 million but less than $4 million is needed, and a 20 percent cost if more than $4 million of new outside equity is required.Tapley's tax rate is
30 percent, and its current stock price is $88 per share.If the firm has an unlimited number of projects which will earn a 10.25 percent return, what is the maximum capital budget that can be adopted without adversely affecting stockholder wealth?

• A)$32.0 million
• B)$15.9 million
• C)$23.0 million
• D)$10.6 million
• E)$26.5 million

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Definitions:

Pronation

The rotation of the hand or forearm so that the palm faces downwards or backwards, or the inward roll of the foot during normal motion.

Depression

A mental health disorder characterized by persistently depressed mood or loss of interest in activities, causing significant impairment in daily life.

Elevation

Movement of a structure in a superior direction.

Inversion

The movement or position in which the sole of the foot is turned inward, opposite of eversion.