Question
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 |
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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