Sharp's Current Capital Structure of 60% Equity, 35% Debt, and 5

Sharp's current capital structure of 60% equity, 35% debt, and 5% preferred stock is considered optimal. This year Sharp expects to have earnings after tax of $3.6 million and to pay out $600,000 in dividends. Sharp can also raise up to $2 million in long-term debt at a pretax interest rate of 10.6% (all debt over $2 million will cost 11.4% pretax) , and sell preferred stock at a cost of 11.5%. Sharp's marginal tax rate is 40%. The current value of Sharp's common stock is $36 and a dividend of $2.15 is expected to be paid during the coming year. Dividends have been growing at an annual compound rate of 8% a year and are expected to continue growing at that rate. New shares can be sold to net the firm $34.50. Sharp has an opportunity to invest in the following capital projects. Which one(s) should be accepted? $\begin{array}{lllc}\text { Project } & \text { Cost } & \text { Annual Cash Flow } & \text { Project Life } \\1 & \$ 3.0 \text { million } & \$ 552,893 & 10 \text { years } \\2 & \$ 2.5 \text { million } & \$ 693,481 & 5 \text { years } \\3 & \$ 2.0 \text { million } & \$ 345,220 & 10 \text { years }\end{array}$

A) 1 and 2 only
B) 1 and 3 only
C) 1, 2, and 3
D) Cannot be determined from the information provided