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:

The company estimates that it can issue debt at a rate of $r_d=11\%,$ and its tax rate is $30\%.$ It can issue preferred stock that

pays a constant dividend of $$4$ per year at $$41$ per share. Also, its common stock currently sells for $$36$ per share; the next

expected dividend, $D_1,$ is $$3\mathrm{.}50$; and the dividend is expected to grow at a constant rate of $7\%$ 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.

$\%$

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

Project $1$

Project $2$

Project $3$

Project $4$

WACC and optimal capital budget

Cost of capital components

& WACC calculation:

After$-$tax cost of debtif$(11-T)$

Cost of preferred stock, $r$

Cost of common stocks $r$