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 = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $48 per share. Also, its common stock currently sells for $33 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

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 %

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

%

Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?

Project 1	_______acceptreject
Project 2	_______acceptreject
Project 3	_______acceptreject
Project 4	_______acceptreject

Cost of debt, rd Tax rate, T Preferred dividend Preferred stock price, Pp Common stock price, P Expected common dividend, D Common stock constant growth rate, gn % common stock in capital structure % debt in capital structure % preferred stock in capital structure 10.00% 30.00% $5.00 $48.00 $33.00 $4.00 5.00% 75.00% 15.00% 10.00% Cost of capital components & WACC calculation Weights After-tax Cost Weighted Cost After-tax cost of debt, rg(1-T) Cost of preferred stock, r Cost of common stock, r 15.00% 10.00% 75.00% Project acceptance analysis Expected Rate Cost $2,000 $3,000 $5,000 $2,000 Proiects of Return Accept Project? YIN 16.00% 15.00% 13.75% 12.50% Formulas Cost of capital components & WACC calculation Weighted Cost #N/A #N/A #N/A #N/A Weights After-tax Cost After-tax cost of debt, rg(1-T) Cost of preferred stock, r Cost of common stock, r 15.00% 10.00% 75.00%, #N/A #N/A #N/A WACC Project acceptance analysis Expected Rate of Return Cost $2,000 Proiects Accept Project? YIN 16.00% #N/A