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

$1$ $$2,00016\mathrm{.}00\%$

$23,00015\mathrm{.}00$

$35,00013\mathrm{.}75$

$42,00012\mathrm{.}50$

The company estimates that it can issue debt at a rate of rd $=9\%,$ and its tax rate is $35\%.$ It can issue preferred stock that pays a constant dividend of $$5$ per year at $$54$ per share. Also, its common stock currently sells for $$30$ per share; the next expected dividend, D$1,$ is $$3\mathrm{.}75$; and the dividend is expected to grow at a constant rate of $4\%$ 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 fill in the blank $2$

$\%$

Cost of preferred stock fill in the blank $3$

$\%$

Cost of retained earnings fill in the blank $4$

$\%$

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

fill in the blank $5$

$\%$

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 debt, rd $9\mathrm{.}00\%$

Tax rate, T $35\mathrm{.}00\%$

Preferred dividend $$5\mathrm{.}00$

Preferred stock price, Pp $$54\mathrm{.}00$

Common stock price, P$0$ $$30\mathrm{.}00$

Expected common dividend, D$1$ $$3\mathrm{.}75$

Common stock constant growth rate, gn $4\mathrm{.}00\%$

$\%$ common stock in capital structure $75\mathrm{.}00\%$

$\%$ debt in capital structure $15\mathrm{.}00\%$

$\%$ preferred stock in capital structure $10\mathrm{.}00\%$

"Cost of capital components

& WACC calculation:" Weights After$-$tax Cost Weighted Cost

After$-$tax cost of debt, rd$(1$ T$)15\mathrm{.}00\%$

Cost of preferred stock, rp $10\mathrm{.}00\%$

Cost of common stock, rs $75\mathrm{.}00\%$

WACC $=$

Project acceptance analysis:

Projects Cost Expected Rate of Return Accept Project? Y$/$N

$1$ $$2,00016\mathrm{.}00\%$

$2$ $$3,00015\mathrm{.}00\%$

$3$ $$5,00013\mathrm{.}75\%$

$4$ $$2,00012\mathrm{.}50\%$

Formulas

"Cost of capital components

& WACC calculation:" Weights After$-$tax Cost Weighted Cost

After$-$tax cost of debt, rd$(1$ T$)15\mathrm{.}00\%$ #N$/$A #N$/$A

Cost of preferred stock, rp $10\mathrm{.}00\%$ #N$/$A #N$/$A

Cost of common stock, rs $75\mathrm{.}00\%$ #N$/$A #N$/$A

WACC $=$ #N$/$A

Project acceptance analysis:

Projects Cost Expected Rate of Return Accept Project? Y$/$N

$1$ $$2,00016\mathrm{.}00\%$ #N$/$A

$2$ $$3,00015\mathrm{.}00\%$ #N$/$A

$3$ $$5,00013\mathrm{.}75\%$ #N$/$A

$4$ $$2,00012\mathrm{.}50\%$ #N$/$A