UPad Wireless Needs to Raise $10 Million to Build Another

question 37

Multiple Choice

UPad Wireless needs to raise $10 million to build another factory to meet the strong demand for its latest product. UPad will either issue 12% bonds at par or common shares that they have determined that investors require a 15% return. The fair value of UPad's currently outstanding bonds is $5 million, it shares is $5 million, and its preferred shares is $5 million. UPad's retained earnings is $5 million. The preferred shares also have a 12% dividend. UPad's tax rate is 30%. What is the minimum hurdle rate UPad should set for this investment project?

• A) 8.4% if UPad issues bonds to finance the factory.
• B) 11.7% if UPad issues preferred shares to finance the factory.
• C) 12.0% if UPad issues bonds or preferred shares to finance the factory.
• D) 12.6% if UPad issues bonds or preferred shares or common shares to finance the factory.
• E) 15.0% if UPad issues common shares to finance the factory.

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Definitions:

Goods-In-Bailment Contract

An agreement where personal property is transferred temporarily into the custody of another for a designated purpose.

Negotiable Document

A document guaranteeing the transfer of certain rights which can be transferred from one party to another through endorsement or delivery.

Nonnegotiable Document

A legal or official document whose terms and conditions cannot be altered or bargained over.

Good-Faith Purchaser

A buyer who purchases property without knowledge of any claims, liens, or encumbrances on the property.