Question

Adamson Corporation is considering four average-risk projects with the following costs and rates of returns Project Cost Expected Rate of Return 16.00% 15.00 $2,000 3,000 5,000 2,000 13.75 12.50 The company estimates that it can issue debt at a rate of rg 11%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $3 per year at $56 per share. Also, its common stock currently sells for $35 per share the next expected dividend, Du, is $3.75, and the dividend is expected to grow at a constant rate of 7 per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. 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: 96 b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Select Project 3 Project 4 L-Select-

Answer 1

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ke Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Cut Σ AutoSum - AC Wrap Text Calibri 11 General Copy Fill В IUT Merge & Center $ % Insert Delete Format Paste +.0 .00 .00 .0 Conditional Format Cell Sort & Find & Format Painter Clear Filter Select Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells A143 AJ AG АН AI AK AL AM AN AO adamson 43 kd 11%(1-0.3) 44 ANS A 45 kd = 7.70% AFTER TAX) 46 kp D/PO kp 3/56 47 48 5.36% 49 ke D1/PO g 50 ke 3.75/350.07 51 17.71% ke= 52 53 54 55 ANS B WACC B*C C WEIGHT COC (%) SOURCE WEIGHTED COST 75% 17.71% 13.286% COMMON STOCK 15% 7.70% 1.155% 59 DEBT 10% 5.36% 0.536% 60 PREFERRED STOCK 61 1 WACC 14.98% 62 63 RI UTILITY, SHARPE, beta CONVEXITY DGM beta LEASING PV, FV, ANNUITY КЕ САРМ DIR right clean YIELD bond portfolio port future INDEX INTL CAP BUD SANDRINE WACC II Rea erences: CF670 120% WA 05:26 TENG 25-11-2019

ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Cut E AutoSum- AC Wrap Text Calibri 11 General Copy Fill в IU Merge & Center Conditional Format Formatting as Table Styles Paste +.0 .00 .00 0 Cell Insert Delete Format Sort & Find & % Format Painter Clear Filter Select Cells Clipboard Font Alignment Number Styles Editing fox A174 AG АН AJ AI AK AL AN AO AM 63 64 ANS C PROJECT SELECTION 65 EXPECTED RATE OF RETURN WACC REASON 14.98% АССEРТ 66 1 16% RETURN WACC 15% 14.98% ACCEPT 67 2 RETURN WACC 14.98% REJECT RETURN WACC 68 3 13.75% 12.50% 14.98% REJECT 69 RETURN< WACC 70 71 72 73 74 75 76 77 78 79 80 81 82 UTILITY, SHARPE, beta RI DGMbeta LEASING PV, FV, ANNUITY КЕ САРМ DIR right YIELD bond portfolio port future INDEX clean cONvexity INTL CAP BUD SANDRINE WACC II 120% Rea erences: CF493 XУ WA 05:26 TENG 25-11-2019