Sharp's Current Capital Structure of 60% Equity, 35% Debt, and 5

question 90

Multiple Choice

Sharp's current capital structure of 60% equity, 35% debt, and 5% preferred stock is considered optimal. This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends. Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6% (all debt over $2 million will cost 11.4% pretax) , and sell preferred stock at a cost of 11.5%. Sharp's marginal tax rate is 40%. The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year. Dividends have been growing at an annual compound rate of 8% a year and are expected to continue growing at that rate. New shares can be sold to net the firm $34.50. Sharp has an opportunity to invest in the following capital projects. Which one(s) should be accepted? $\begin{array}{lllc}\text { Project } & \text { Cost } & \text { Annual Cash Flow } & \text { Project Life } \\1 & \$ 3.0 \text { million } & \$ 552,893 & 10 \text { years } \\2 & \$ 2.5 \text { million } & \$ 693,481 & 5 \text { years } \\3 & \$ 2.0 \text { million } & \$ 345,220 & 10 \text { years }\end{array}$

• A) 1 and 2 only
• B) 1 and 3 only
• C) 1, 2, and 3
• D) Cannot be determined from the information provided

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Definitions:

ANOVA

Analysis of variance. A comparison of the variance within groups with the variance among groups. See also MANOVA.

Multivariate

Pertaining to three or more variables, as in multivariate analyses or multivariate statistics.

Univariate

Pertaining to an analysis or representation that involves only one variable to understand its distribution or impact in isolation.

Bivariate

Pertaining to two variables, as in bivariate analysis or bivariate statistics.