Step $3$: Practice: WACC and Optimal Capital Budgeting

Now it$$s time for you to practice what you$$ve learned.

Suppose Mullens Corporation is considering three average$-$risk projects with the following costs and rates of return:

Project

Cost

Expected Rate of Return

$1$ $$3,50042\mathrm{.}00\%$

$2$ $$4,00039\mathrm{.}00\%$

$3$ $$3,75045\mathrm{.}00\%$

Mullens estimates that it can issue debt at a rate of rd$=30\mathrm{.}00\%$

and a tax rate of T$=15\mathrm{.}00\%$

$.$ It can issue preferred stock that pays a constant dividend of Dp$=$$$10\mathrm{.}00$

per year and at Pp$=$$$40\mathrm{.}00$

per share.

Also, its common stock currently sells for P$0=$$$10\mathrm{.}00$

per share. The expected dividend payment of the common stock is D$1=$$$4\mathrm{.}00$

and the dividend is expected to grow at a constant annual rate of g$=10\mathrm{.}00\%$

per year.

Mullens$$ target capital structure consists of ws$=75\mathrm{.}00\%$

common stock, wd$=15\mathrm{.}00\%$

debt, and wp$=10\mathrm{.}00\%$

preferred stock.

The after$-$tax cost of debt is approximately $.$

The cost of preferred stock is approximately $.$

The cost of common stock is approximately $.$

The WAAC is approximately $.$

Suppose that Mullens will only accept projects with an expected rate of return that exceeds the WAAC.

Which of the following projects will Mullens accept? Check all that apply.

Project $1$

Project $2$

Project $3$