Question
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
| Project | Cost | Expected Rate of Return |
| 1 | $2,000 | 16.00% |
| 2 | 3,000 | 15.00 |
| 3 | 5,000 | 13.75 |
| 4 | 2,000 | 12.50 |
The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $5 per year at $50 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
- What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: %
- What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. %
- Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
Project 1 -Select- Accept, Reject Project 2 -Select- Accept, Reject Project 3 -Select- Accept, Reject Project 4 -Select- Accept, Reject
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Business Ethics A Stakeholder And Issues Management Approach
Authors: Joseph W. Weiss
7th Edition
1523091541, 978-1523091546
