12. Problem 10.12 (WACC)

eBook

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 11% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (D₀) was $2.60, its expected constant growth rate is 5%, and its common stock sells for $28. 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 10%. These two projects are equally risky and about as risky as the firm's existing assets.

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

%

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

%

Which projects should Empire accept?

Project A or Project B?