Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r d = 10% as

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 45% debt and 55% common equity. Its last dividend (D0) was $1.50, its expected constant growth rate is 5%, and its common stock sells for $22. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 9%. 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?

    Project A or Project 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

International Finance For Dummies

Authors: Ayse Evrensel

1st Edition

111852389X, 978-1118523896

More Books

Students also viewed these Finance questions