Mars Car Company Has a Capital Structure Made Up of 40

question 81

Multiple Choice

Mars Car Company has a capital structure made up of 40% debt and 60% equity and a tax rate of 30%.A new issue of $1,000 par bonds maturing in 20 years can be issued with a coupon of 9% at a price of $1,098.18 with no flotation costs.The firm has no internal equity available for investment at this time,but can issue new common stock at a price of $45.The next expected dividend on the stock is $2.70.The dividend for Mars Co.is expected to grow at a constant annual rate of 5% per year indefinitely.Flotation costs on new equity will be $7.00 per share.The company has the following independent investment projects available:
Which of the above projects should the company take on?

• A) Project 3 only
• B) Projects 1 and 2
• C) Projects 1 and 3
• D) Projects 1, 2 and 3

---

Definitions:

Benefits

Various forms of value or advantages that individuals or organizations receive, which can include health insurance, pensions, or profits.

Costs

The expenditure required to produce, acquire, or maintain a product or service, including materials, labor, and overhead expenses.

Absolute Advantage

The ability of an entity to produce a good or service more efficiently than its competitors, using fewer resources.

Comparative Advantage

The capacity for a person, company, or nation to generate a product or offer a service at a lesser opportunity cost compared to its rivals.