Anderson Company Has Four Investment Opportunities with the Following Costs

question 77

Multiple Choice

Anderson Company has four investment opportunities with the following costs (all costs are paid at t = 0) and estimated internal rates of return (IRR) : $\begin{array}{ccc} \underline{\text { Project}}& \underline{\text { Cost }}& \underline{\text {IRR }}\\ \mathrm{A} & \$ 2,000 & 16.0 \% \\\mathrm{~B} & 3,000 & 14.5 \\\mathrm{C} & 5,000 & 11.5 \\\mathrm{D} & 3,000 & 9.5\end{array}$
The company has a target capital structure which consists of 40 percent common equity, 40 percent debt, and 20 percent preferred stock.The company has $1,000 in retained earnings.The company expects its year-end dividend
To be $3.00 per share (i.e., $\hat { \mathrm { D } } _ { 1 }$ = $3.00) .The dividend is expected to grow at a constant rate of 5 percent a year.The
Company's stock price is currently $42.75.If the company issues new common stock, the company will pay its investment bankers a 10 percent flotation cost.The company can issue corporate bonds with a yield to maturity of
10 percent.The company is in the 35 percent tax bracket.How large can the cost of preferred stock be (including flotation costs) and it still be profitable for the company to invest in all four projects?

• A)7.75%
• B)8.90%
• C)10.46%
• D)11.54%
• E)12.68%

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Definitions:

Voice-Activated

Describes technology that allows devices to be controlled or operated through voice commands, typically involving a virtual assistant.

Expected Revenue

The anticipated amount of money a company expects to receive from its activities over a period, based on forecasted sales volumes and selling prices.

Thought-Activated

Technology or systems that are controlled by the user's thoughts or brain signals, often used in assistive devices and interfaces.

Expected Revenue

The projected amount of money a company anticipates generating from the sales of goods or services over a certain period.