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 $2,000 16.00% 3,000 15.00 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $3 per year at $57 per share. Also, its common stock currently sells for $31 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. 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 6.60 % Cost of preferred stock 5.26 % Cost of retained earnings 9.68 % b. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. 8.78 % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 accept Project 2 accept Project 3 reject Project 4 reject