Problem 10-18 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 rd = 11%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $3 per year at $52 per share. Also, its common stock currently sells for $37 per share; the next expected dividend, D1, is $4.50; 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.

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 of the following projects should be either accepted or rejected?

Project 1
Project 2
Project 3
Project 4