Question
14. Renata Ltd. uses only debt and common equity. It can borrow unlimited amounts at an interest rate of 8% as long as it finances
14. Renata Ltd. uses only debt and common equity. It can borrow unlimited amounts at an interest rate of 8% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend was $2.5, expected constant growth in dividends is 6% and the companys common stock currently sells for $25. Marginal tax rate is 25%. The company has two projects available: Project A has a rate of return of 11% and project Bs return is 10.5%. Both projects are equally risky and about as risky as the firms existing assets.
a. What is the cost of common equity?
b. What is the WACC?
c. Which project should the company accept?
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