Valley Flights, Inc 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 the firm 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:
Project Initial Outlay IRR
1 $100,000 10%
2 $10,00 8.5%
3 $50,000 12.5%
Which of the above projects should the company take on?
A) Projects 1 and 3 B) Project 3 only
C) Projects 1 and 2 D) Projects 1, 2 and 3
A
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