Question
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
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 = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $45 per share. Also, its common stock currently sells for $38 per share; the next expected dividend, D1, is $4.50; 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.
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. %
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