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WACC and Optimal Capital Budget (2 points) Adams Corporation is considering four average-risk projects with the following rates of return: Project Expected Rate of Return
WACC and Optimal Capital Budget (2 points) Adams Corporation is considering four average-risk projects with the following rates of return: Project Expected Rate of Return 1 14.00% 2 13.00% 3 12.75% 4 11.50% Adams Corporation just issued 10-year bonds that pay a 9.8% semiannual coupon. The bonds have a price of $987.54 and a par value of $1,000 It can issue preferred stock with dividend of $5 per year at $50/share The current common stock price is $36/share and the last dividend paid was $2.40. Dividends are expected to grow at a constant rate of 6% per year The risk premium, RP, of the stock over its cost of debt is 3.5% The company has a beta of 1.7, the yield on treasury bills is 3% and the return on the market is 9% Target capital structure is 75% common stock, 15% debt and 10% preferred stock. The company's tax rate is 30% . 1. What is the cost of debt? 2. What is the cost of preferred stock? 3. Using the dividend growth model, what is the expected cost of equity, rs? 4. Using the capital asset pricing model, CAPM, what is the required cost of equity, rs? 5. Using the risk-premium-of-equity-over-the-cost-of-debt method, what is the expected cost of equity,re? 6. Using your results from the three methods above, what is the average cost of equity, 7. Which of the following statement about the weights of capital is INCORRECT? a. The weight of common stock (equity) is 75% b. The weight of each type of capital can't be calculated from this information C. The weight of preferred is 10% d. The weight of debt is 15% e. When added together, the weights have to equal 100% 8. What is Adams' WACC? 9. Refer to answer you calculated for WACC and the four projects listed above. Which am # am Members' Names/Initials: of the following statements is INCORRECT? a. If the projects are mutually exclusive, you can do project 1 b. If the projects are independent, you can do Projects 1, 2 and 3 C. If the projects are independent, you can do all projects with a return greater than the WACC d. If the projects are mutually exclusive, you can do all projects 10. A hotel chain has a WACC of 10%. The company has a cost of debt, rd, of 9%, a cost of equity, rs, of 13%, and no preferred stock. The hotel chain's tax rate is 40%. What percent of the hotel chain's capital is from equity (w.)? (1 point)
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