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The following information is available for B&E Construction Ltd.'s capital structure:
Equity Financing: 65% by ordinary shares, of which the company management plans to pay a $7.25 dividend per share in the next financial year. The firm is maintaining a 5.5 % annual growth rate in dividends, which is expected to continue indefinitely.
Debt Financing: 35% by corporate bonds that pay semi-annually 11.5% coupon rate with an annual before-tax yield to maturity of 10.25%. The bond issue has a face value of $1,000 and will mature in 35 years.
The net income of B&E Construction Ltd. in the current financial year is $1,540,760, and the company is considering investing in one of the two following projects to buy new machinery. Each option will last five years and have no salvage value at the end. The company's required rate of return for all investment projects is 9.5 %. The cash flows of the projects are provided below.
Option 1
Option 2
Cost
$482,000
$535,000
Future Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
177 000
173 000
163 000
165 000
155 000
197 000
185 000
176 000
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