Question

Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Cost Expected Rate of Return A $2,000 16.00% 3,000 15.00 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $51.00 per share. Also, its common stock currently sells for $35.00 per share; the next expected dividend, D1, is $3.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. AWN a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. %

Answer 1

a) Cost of debt 8.25% -11%*(1-25%) Cost of preferred stock 11.76% =6/51 Cost of retained earnings 15.29% =3.25/35+6% b) WACC 13.88% =15.29%*75%+8.25%* 15%+11.76%*10% c) Project 1 Project 2 Accept Accept Reject Reject Project 3 Project 4

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