Question
10.7 Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r d = 10%
10.7 Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (D0) was $2.70, its expected constant growth rate is 3%, and its common stock sells for $21. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 15%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets.
The Evanec Company's next expected dividend, D1, is $3.63; its growth rate is 5%; and its common stock now sells for $38.00. New stock (external equity) can be sold to net $30.40 per share.
rs = %
F = %
re = % |
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