Tapley Inc

question 95

Multiple Choice

Tapley Inc.'s current (target) capital structure has a target debt-to-assets 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 that 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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