Far Out Tech (FOT) Has a Debt Ratio of 0

question 85

Multiple Choice

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:

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

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