Abstergo Industries uses only debt and common equity. It can borrow unlimited amounts at 5% as long as it finances at its target capital structure which calls for 35% debt and 65% common equity. It just paid a dividend of $2, its expected constant growth rate is 5%, and its common stock sells for $20. The companys tax rate is 20%. Two projects are available: A, which has a rate of return of 15%, and B, which has a rate of return of 12%. The two 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 projects (if any) should Abstergo accept?

8. Veridian Dynamics estimates that its WACC is 10%. The company is considering the following capital budgeting projects. Assume that each of the projects is just as risky as the firms existing assets and that the firm may accept all of the projects or only some of them. Which set of projects should be accepted, and why?

PROJECT SIZE. RATE OF RETURN

A. $1,000,000 15.0%

B $2,000,000 12.0%

C $2,000,000 10.0%

D $1,000,000 8.5%