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% 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.

1. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.

   %

2. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.

   %

3. Which projects should Empire accept?

   -Select- Project AProject B

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.

1. What is Evanec's cost of retained earnings, r_s? Do not round intermediate calculations. Round your answer to two decimal places.

r_s = %

2. What is Evanec's percentage flotation cost, F? Round your answer to two decimal places.

F = %

3. What is Evanec's cost of new common stock, r_e? Do not round intermediate calculations. Round your answer to two decimal places.

r_e = %