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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

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 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $54.00 per share. Also, its common stock currently sells for $38.00 per share; the next expected dividend, D1, is $4.25; 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? Do not round intermediate calculations. Round your answers to two decimal places.

Cost of debt: %

Cost of preferred stock: %

Cost of retained earnings: %

What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places.

%

Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?

Project 1 -Select-AcceptRejectItem 5
Project 2 -Select-AcceptRejectItem 6
Project 3 -Select-AcceptRejectItem 7
Project 4

-Select-AcceptRejectItem 8

image text in transcribed

Ch 10: End-of-Chapter Problems - The Cost of Capital (i) The company estimates that it can issue debt at a rate of rd=9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $54.00 per share. Also, its common stock currently sells for $38.00 per share; the next expected dividend, D1, is $4.25; 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? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: Cost of preferred stock: % Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Project 3 Project 4

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