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Jewelry Corporation has two investment projects with the following rates of return: Project A 8% Project B 10% The company estimates that it can issue
Jewelry Corporation has two investment projects with the following rates of return: Project A 8% Project B 10% The company estimates that it can issue debt at a before-tax cost of 8 percent, and its tax rate is 30 percent. The company also can issue preferred stock at $30 per share, which pays a constant dividend of $3 per year. The company's stock currently sells at $35 per share with flotation cost of 9% (F=9%). The year-end dividend (D1) is expected to be $2.50, and the dividend is expected to grow at a constant rate of 5 percent per year. The company's capital structure consists of 40 percent common stock, 30 percent debt, and 30 percent preferred stocks Required: 1. What is the cost of each of the capital components? 2. Calculate the cost of retained earnings using DCF approach? 3. What is the WACC, if the company depends on cost of equity by issuing new common stock? 4. Which projects should the firm select if the projects are all of average risk
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