Question
10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate
10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the following costs and rates of return:
Project Cost Expected Rate of Return
1 $2,000 50%
2 3,000 40
3 5,000 30
4 2,000 20
The company estimates that it can issue debt at a before-tax-cost of rd = 5%, and its tax rate is 30 percent. The company also can issue preferred stock a $100 per share, which pays a constant dividend of $5 per year. The companys common stock currently sells at $40 per share. The year-end dividend, D1, is expected to be $5.00, and the dividend is expected to grow at a constant rate of 5 percent per year. The companys capital structure consists of 50 percent common stock, 40 percent debt, and 10 percent preferred stock. (50 points)
- What is the cost of each of the capital components?
- What is Adams WACC?
- Which projects should Adams accept?
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