Business, 31.10.2021 03:10, solizpaco7124
WACC AND OPTIMAL CAPITAL BUDGET
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Project Cost Expected Rate of Return
1 $2,000 16.00%
2 3,000 15.00
3 5,000 13.75
4 2,000 12.50
The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $59 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $4.00; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.
Cost of debt
5.40
%
Cost of preferred stock
10
%
Cost of retained earnings
%
What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
%
Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
Project 1
-Select-
Project 2
-Select-
Project 3
-Select-
Project 4
-Select-
Answers: 1
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WACC AND OPTIMAL CAPITAL BUDGET
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