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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:
Project Initial Outlay IRR1 $100,0000 10%2 $10,000 8.5%3 $50,000 12.5%
Which of the above projects should the company take on?A)Project 3 only B) Projects 1, 2, and 3C) Projects 1 and 3 D) Projects 1 and 2
There is a $40,000 realized gainon the sale of the land and no realized gain or loss on the sale ofthe bonds. Are the tax consequences to Ivan and Grace the same for each of the five years? Explain.
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