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

Project	Cost	Expected Rate of Return
1	$2,500	21.00%
2	$3,000	28.00%
3	$2,750	29.00%

Mullens estimates that it can issue debt at a rate of rd=15.00%rd=15.00% and a tax rate of T=20.00%T=20.00%. It can issue preferred stock that pays a constant dividend of Dp=$10.00Dp=$10.00 per year and at Pp=$100.00Pp=$100.00 per share.

Also, its common stock currently sells for P0=$16.00P0=$16.00 per share. The expected dividend payment of the common stock is D1=$4.00D1=$4.00 and the dividend is expected to grow at a constant annual rate of g=5.00%g=5.00% per year.

Mullens target capital structure consists of ws=80.00%ws=80.00% common stock, wd=10.00%wd=10.00% debt, and wp=10.00%wp=10.00% preferred stock.

According to the video, the after-tax cost of debt can be stated as . Plugging in the values for rdrd and (T)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 DpDp and PpPp 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 D1D1, P0P0, and gg yields a cost of common stock of approximately .

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

WAACWAAC	= =	(% of debt)(After-tax cost of debt)% of debtAfter-tax cost of debt
		+(% of preferred stock)(Cost of preferred stock)+% of preferred stockCost of preferred stock
		+(% of Common equity)(Cost of common equity)+% of Common equityCost 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