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

Project

Cost

Expected Rate of Return

$1$ $$2,50025\mathrm{.}00\%$

$2$ $$3,00018\mathrm{.}00\%$

$3$ $$2,75020\mathrm{.}00\%$

Mullens estimates that it can issue debt at a rate of rd$=20\mathrm{.}00\%$

and a tax rate of T$=25\mathrm{.}00\%$

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

per year and at Pp$=$$$100\mathrm{.}00$

per share.

Also, its common stock currently sells for P$0=$$$23\mathrm{.}75$

per share. The expected dividend payment of the common stock is D$1=$$$4\mathrm{.}75$

and the dividend is expected to grow at a constant annual rate of g$=5\mathrm{.}00\%$

per year.

Mullens$$ target capital structure consists of ws$=70\mathrm{.}00\%$

common stock, wd$=20\mathrm{.}00\%$

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

preferred stock.

According to the video, the after$-$tax cost of debt can be stated as $.$ Plugging in the values for rd

and $($T$)$

yields an after$-$tax cost of debt of approximately $.$

According to the video, the cost of preferred stock can be stated as $.$ Plugging in the values for Dp

and Pp

yields a cost of preferred stock of of approximately $.$

Hint: Assume no flotation costs.

According to the video, the cost of common stock can be stated as $.$ Plugging in the values for D$1$

$,$ P$0$

$,$ and g

yields a cost of common stock of approximately $.$

Recall that the equation for the weighted average cost of capital $($WAAC$)$ can be stated as:

WAAC

$=$

$(\%$ of debt$)\backslash$times $($After$-$tax cost of debt$)$

$+(\%$ of preferred stock$)\backslash$times $($Cost of preferred stock$)$

$+(\%$ of Common equity$)\backslash$times $($Cost of common equity$)$

Plugging in the relevant values into the formula for WACC yields a WAAC of 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 $3$