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 $45\%$ debt and $55\%$ common equity. Its last dividend $(D_0)$ was $$3\mathrm{.}40,$ its expected constant growth rate is $3\%,$ and its common stock sells for $$25.$ EEC's tax rate is $25\%.$ Two projects are available: Project A has a rate of return of $14\%,$ and Project B$\text{'}$s return is $12\%.$ These two projects are equally risky and about as risky as the firm's existing assets.

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

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

$\%$

c$.$ Which projects should Empire accept?