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

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Definitions:

Materials Price Variance

This is the difference between the actual cost of direct materials and the standard cost, multiplied by the quantity purchased.

October

The tenth month of the year in the Gregorian calendar, preceding November.

Variable Overhead Efficiency Variance

This is the difference between the expected (standard) cost of variable overheads based on actual production outputs and the actual variable overhead costs incurred.

Materials Quantity Variance

A measure of the difference between the actual quantity of materials used in production and the standard quantity expected to be used, multiplied by the standard cost per unit of materials.