Which set of projects should be accepted? What is the firm’s optimal capital budget?

[Hors]

Which set of projects should be accepted? What is the firm’s optimal capital budget?

2. The following information pertains to a firm:
 Target Capital Structure: 30% debt, 10% preferred stock, 60% common equity
- Debt: 200 bonds trading at $970 with 8 years of remaining term, pay 12% coupon rate, semiannually, $1000 par value.
- Preferred Stock: $100 par value, dividend of 4%, trading at $98.
- Common Equity: Beta is 1.2, and the last dividend paid was $1.30. The risk-free rate is 5% and the return on the market is 14%.
 Dividend payout is 40%.
 Flotation costs are 0% on debt, 16% on common equity and 20% on preferred stock.
 Total effective tax rate (federal and state) = 35%.
 Sustainable growth rate = 3.5%.
 Forecast net income for next year is $1,523,000.
 Investment Opportunities:
Project​Investment​MIRR
Alpha​ $1.0 MM​13.0%
Bravo​ $2.0 MM​14.2%
Charlie​ $1.2 MM​12.7%
Delta​ $2.3 MM​15.0%
Echo​ $0.5 MM​10.9%
Foxtrot​ $1.5 MM​11.3%
​Assume that each project is independent and that each is just as risky as the firm’s existing assets. Which set of projects should be accepted (list them in order of priority), and what is the firm’s optimal capital budget? How much in NEW common equity will the firm need to raise? (You will have to work through multiple steps – some with subparts – to answer these questions. Just go step by step, maybe even starting at the end of the process and working your way back through to find the information you need.)