Anderson Company Has Four Investment Opportunities with the Following Costs

question 27

Multiple Choice

Anderson Company has four investment opportunities with the following costs (all costs are paid at t = 0) and estimated internal rates of return (IRR) : The company has a target capital structure that consists of 40 percent common equity, 40 percent debt, and 20 percent preferred stock.The company has $1,000 in retained earnings.The company expects its year-end dividend to be $3.00 per share (i.e., = $3.00) .The dividend is expected to grow at a constant rate of 5 percent a year.The company's stock price is currently $42.75.If the company issues new common stock, the company will pay its investment bankers a 10 percent flotation cost.The company can issue corporate bonds with a yield to maturity of 10 percent.The company is in the 35 percent tax bracket.How large can the cost of preferred stock be (including flotation costs) and it still be profitable for the company to invest in all four projects?

• A) 7.75%
• B) 8.90%
• C) 10.46%
• D) 11.54%
• E) 12.68%

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