Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an

Question:

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D₀) was $2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EEC’s tax rate is 40%. Two projects are available: Project A has a rate of return of 12% and Project B’s return is 11%. These two projects are equally risky and about as risky as the firm’s existing assets.
a. What is its cost of common equity?
b. What is the WACC?
c. Which projects should Empire accept?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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