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Case Study: Finance Plan for a Technology Project You are the technology comptroller for a mid-sized publicly-traded company. You are con- sidering how to finance a new process that will require an initial investment of $2.5 million. You have already determined that the proposed project’s internal rate of return is 13%. On a market value basis, your firm’s target capital structure, which management regard as optimal, is as follows: Debt Preferred equity Common equity 45% 10% 45% The common stock is trading at $75 per share. The $100 par value 6.5% preferred stock is trading at $50 per share. The 2021 common dividend was $9 per share, and the company has increased this by 6% per year for the past ten years. The firm also has $1,000 par value 6.5% coupon bonds outstanding with a remaining maturity of ten years. The bonds are tra- ding at 92% of par. The capital markets are quite receptive to the firm’s debt and equity issues, all of which trade actively on the Nasdaq as well as the regional exchanges. In addition to this, your firm’s bank has agreed to put up a limited amount of fully-secured finance at 5% p.a. This would come to a maximum of $600,000. The bank has also offered up to $200,000 of additional, unsecured, finance at 10% p.a. However, the unsecured funds would be subject to significant restrictive covenants. Based upon the company’s conservative retention policy and healthy cash reserves, you are confident that it could fund virtually the entire project out of existing retained earnings. The company’s effective income tax rate is 20%. In addition to the information above, you are aware of the following capital market data: Average yield on 10-year US Treasury obligations over past twenty years Market risk premium (MRP) estimate The average beta of similar mid-sized companies in your industry The beta analysts have calculated for your company Peer average debt ratio Peer average bond yield to maturity 5.00% 6.50% 2.00 1.95 55% 9.00%