Question
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $1.95, its expected constant growth rate is 3%, and its common stock sells for $23. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 12%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets.
What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. %
What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. %
Which projects should Empire accept?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started