H 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 retum 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 - 10%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $4 per year at $42 per share. Also, its common stock currently sells for $38 per share the next expected dividend, D., $3.75; 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 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 - 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 olla Project 3 Project 4 Check My Work Reset Problem WACC and optimal capital budget WoWN 3 Cost of debt, 4 Tax rate. T 5 Preferred dividend 6 Preferred stock price, Pp 7 Common stock price, Po 8 Expected common dividend, D. 9 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, Po(1-T) 16 Cost of preferred stock, 17 Cost of common stock, 1B 19 20 Project acceptance analysis: 10.00% 35.00% $4.00 $42.00 $38.00 $3.75 7.00% 75.00% 15.00% 10.00% Weighted Cost Weights After-tax Cost 15.00% 10.00% 75.00% WACC - Accept Project? YIN 21 22 23 24 25 26 Projects 1 2 3 4 Cost $2,000 $3,000 $5,000 $2,000 Rate of Return 16.00% 15.00% 13.75% 12.50% TH DP Sheet1 + G Weights After-tax Cost 15.00% #N/A 10.00% #N/A 75.00% #N/A WACC = Weighted Cost #N/A #N/A #NA #NA 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, Po 32 Cost of common stock, r. 33 34 35 Project acceptance analysis: 36 Projects 37 1 38 2 39 3 40 41 42 43 44 45 46 47 48 49 Rate of Return 16.00% 15.00% 13.75% 12.50% Cost $2,000 $3,000 $5,000 $2,000 Accept Project? Y/N #N/A WNIA WNIA WNIA 4 co
