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Question
Takeda Enterprises has four investment opportunities with the following costs (all costs are paid at t = 0) and estimated internal rates of return (IRR):
Project Cost IRR
A $1,000 15.0%
B 2,000 12.0
C 1,000 10.5
D 3,000 10.0
The company wants to maintain a capital structure of 50 percent debt and 50 percent equity. The company anticipates that it can issue up to $2,000 of debt at an interest rate of 10 percent; if it issues more than $2,000 of debt its interest rate will increase to 11 percent. The company's stock price (P0) is currently $90 per share, its expected dividend (
) is $6, and its dividend growth rate is 5 percent. The company expects to have $3,000 in retained earnings and its tax rate is 30 percent. What percentage flotation cost makes the net present value of accepting Project D zero? (Hint: Project D will be selected only after Projects A, B, and C have been selected.)
a. 18.77%
b. 22.12%
c. 24.10%
d. 27.33%
e. 30.25%
Answer
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