Excel Online Structured Activity: WACC and optimal capital budget

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 r_d = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $4 per year at $57 per share. Also, its common stock currently sells for $34 per share; the next expected dividend, D₁, is $4.00; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

1. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.

   Cost of debt fill in the blank 2%

   Cost of preferred stock fill in the blank 3%

   Cost of retained earnings fill in the blank 4%

2. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations.

   

Video Excel Online Structured Activity: WACC and optimal capital budget 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 ra = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $4 per year at $57 per share. Also, its common stock currently sells for $34 per share; the next expected dividend, Dy, is $4.00; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations. Cost of debt % Cost of preferred stock % Cost of retained earnings % b. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. Excel template - Saved O Search File Home Insert Draw Page Layout Formulas Data Review View Help Editing Arial V10 v ' .. v Av Align aby Wrap Merge Per C15 fx B D m 11 F G 5 I 1 A WACC and optimal capital budget Noco AWN Cost of debt, Tax rateT Preferred dividend Preferred stock price, Pp Common stock price, P. Expected common dividend, D Common stock constant growth rate, 10 % common stock in capital structure 11 % debt in capital structure 12 % preferred stock in capital structure 13 Cost of capital components 14 & WACC calculation: 15 After-tax cost of debt, r.(1-T) 16 Cost of preferred stock, Po 17 Cost of common stock, 9.00% 40.00% $4.00 $57.00 $34.00 S4.00 5.00% 75.00% 15.00% 10.00% Weighted Cost Weights After-tax Cost 15.00% 10.00% 75.00% WACC = 18 19 20 Project acceptance analysis. Accept Project? Y/N Cost $2.000 $3,000 $5.000 $2.000 Rate of Return 16.00% 15.00% 13.75% 12.50% 21 Projects 22 1 23 2 24 3 25 4 26 27 Formulas 28 Cost of capital components 29 & WACC calculation: 30 After-tax cost of debt, ra(1-T) 31 Cost of preferred stock, r. 32 Cost of common stock, r. 33 34 35 Project acceptance analysis: Weights After-tax Cost 15.00% #N/A 10.00% #NIA 75.00% #N/A WACC = Weighted Cost #N/A #N/A #N/A #N/A Projects 36 37 38 39 40 41 Rate of Return 16.00% 15.00% 13.75% 12.50% AWN Cost $2,000 $3.000 $5,000 $2.000 2 3 4 Accept Project? Y/N #N/A #N/A #N/A #N/A