10-8 COST OF COMMON EQUITY AND WACC

Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is P0 $22 00. The last dividend was D0 $2 25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?

11-6 NPV Your division is considering two projects with the following cash flows (in millions):

0123

Project A -$25 $5$10$17

Project B-$20$10$9 $6

• A.What are the projects' NPVs assuming the WACC is 5%? 10? 15?
• B.What are the projects' IRRs at each of these WACCs?
• C.If the WACC was 5% and A and B were mutually exclusive, which project would you choose?What if the WACC was 10% 15% (Hint:The crossover rate is 7.81%.)

11-10 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS

A firm with a WACC of 10% is considering the following mutually exclusive projects:

01234 5

Project 1-$200$75$75$75$190$190

Project 2-$650 $250 $250$125$125$125

Which project would you recommend? Explain