Question

WACC and optimal capital budget

Adamson Corporation is considering four average-risk projects with the following costs and rates of return:

Project	Cost	Expected Rate of Return
1	$2,000	16.00%
2	3,000	15.00
3	5,000	13.75
4	2,000	12.50

The company estimates that it can issue debt at a rate of r_d = 11%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $5 per year at $43 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, D₁, is $4.25; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

1. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.
   Cost of debt  %
   Cost of preferred stock  %
   Cost of retained earnings  %
   
2. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
   %

Answer 1

© © cost of debt [ke) company issue debt at a rate of [kd]= 11% tare rete = 40t. after tane cost of debt [1dJ= 11 (1-40%) = 16.6. ☺ cost of prefferred shock [kp) preferred stock pays a constant dividend of $5 shore price = $43, 1. kp = dividend kp share mice - 3 -) (11.637.

® cast of Sretained comings Chr) Cost en - kr = + growth rate a Market mice 4.25 33 +0.04 =) ( 16.08%) © calculation calculation WACC of WACC WACC = weight xky & weight of a lat weight xke of retained . debt of proefend stock debt of earning = 0.75 X 16.887. + 0.15X6,6%. + 0.10 % 11,63.). Mode =) 114.81.7.) ح- .