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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 18.00%
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 18.00% 2 $3,000 25.00% 3 $2,750 26.00% Mullens estimates that it can issue debt at a rate of ra = 10.00% and a tax rate of T = 10.00%. It can issue preferred stock that pays a constant dividend of D = $10.00 per year and at Pp = $50.00 per share. Also, its common stock currently sells for Po= $21.25 per share. The expected dividend payment of the common stock is D = $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 w, = 80.00% common stock, wd = 10.00% debt, and wp=10.00% preferred stock. . Plugging in the values for rd and (T) yields an after-tax cost of According to the video, the after-tax cost of debt can be stated as debt of approximately . Plugging in the values for D and P yields a cost of preferred According to the video, the cost of preferred stock can be stated as stock of of approximately Hint: Assume no flotation costs. . Plugging in the values for D, Po, and g yields a cost of common According to the video, the cost of common stock can be stated as stock of approximately Recall that the equation for the weighted average cost of capital (WAAC) can be stated as: WAAC = (% of debt) x (After-tax cost of debt) + (% of preferred stock) x (Cost of preferred stock) + (% of Common equity) x (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. O Project 1 Project 2 Project 3
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