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 29.00%

2 $3,000 22.00%

3 $2,750 24.00%

Mullens estimates that it can issue debt at a rate of rd=20.00% and a tax rate of T=20.00%. It can issue preferred stock that pays a constant dividend of Dp=$10.00 per year and at Pp=$100.00 per share. Also, its common stock currently sells for P0=$17.00 per share. The expected dividend payment of the common stock is D1=$4.25 and the dividend is expected to grow at a constant annual rate of g=5.00% per year. Mullens target capital structure consists of ws=75.00% common stock, wd=15.00% debt, and wp=10.00% preferred stock.

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 ?.

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.

The cost of common stock can be stated as ?

Plugging in the values for D1, P0, 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)(After-tax cost of debt) +(% of preferred stock)(Cost of preferred stock) +(% of Common equity)(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