10-11

WACC AND PERCENTAGE OF DEBT FINANCING Hook industries capital structure consist of 55% common equity and 45% debt, and its tax rate is 40%. Olsen must raise additional capital cost of r_d = 11%, and its common stock currently pays a $2.00 dividend per share (D₀ = $2.00). The stocks price is currently $2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EECs tax rate is 40%. Two projects are available: Project A has a rate of return of 12%, and Project Bs return is 11%. These two projects are equally risky and about as risky as the firms existing assets.

1. What is its cost of common equity?
2. What is the WACC?
3. Which projects should Empire accept?