Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1.Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at r d = 10%, and its common stock currently

1.Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 10%, and its common stock currently pays a $3.50 dividend per share (D0 = $3.50). The stock's price is currently $32.50, its dividend is expected to grow at a constant rate of 8% per year, its tax rate is 25%, and its WACC is 13.80%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places.

%

2.

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 40% debt and 60% common equity. Its last dividend (D0) was $1.80, its expected constant growth rate is 6%, and its common stock sells for $27. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and Project B's return is 10%. 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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance An Introduction To Accounting And Financial Management

Authors: Louis C. Gapenski

4th Edition

1567932800, 978-1567932805

More Books

Students also viewed these Finance questions