Question

tion 1 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 re-9, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $3 per year at $49 per share. Also, its common stock currently sells for $30 per share the next expected dividend, D, is $3.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet 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 5. What is Adamson's WACC Round your answer to two decimal places. Do not round your intermediate calculations c. Only projects with expected returns that exceed wACC will be accepted, which projects should Adamson accept? Project 1 Project 2 JUNI Project Project 4

Answer 1

B с D 9% 40% 3.00 49.00 $ $ $ $ 30.00 A 3 cost of debt, rd 4 Tax rate, T 5 Preferred dividend 6 Preferrd stock price 7 Common stock Price 8 Expected common dividend 9 Growth rate 10 % common stock 11 %Debt 12 %Preferred stock 13 Cost of capital components & 14 WACC calculations 15 After - Tax cost of Debt 16 Cost of preferred stock 17 Cost of common stock 18 19 20 Project Acceptance Analysis: 3.25 6% 75% 15% 10% Weights After-tax Cost Weighted cost 15% 5.40% 0.81% 10% 6.12% 0.61% 75% 16.83% 12.63% WACC = 14.05% 21 Projects 1 Accept Project? Y/N Y 22 23 24 Expected Rate of Return 16% 15% 13.75% 12.50% Costs $2,000.00 $3,000.00 $5,000.00 $2,000.00 2 Y 3 N 25 4 N

Formulas will be as follows:

B А 3 cost of debt, rd 4 Tax rate, T 5 Preferred dividend 6 Preferrd stock price 7 Common stock Price 8 Expected common dividend 9 Growth rate 10 % common stock 11 %Debt 12 %Preferred stock 13 Cost of capital components & 14 WACC calculations 15 After - Tax cost of Debt 16 Cost of preferred stock 17 Cost of common stock 18 19 20 Project Acceptance Analysis: 0.09 0.4 3 49 30 3.25 0.06 0.75 0.15 0.1 Weights =B11 =B12 After-tax Cost =B3*(1-B4) =B5/B6 = (B8/B7)+B9 WACC = Weighted cost =B15*C15 =B16 C16 =B17*C17 =SUM(D15:017) =B10 21 Projects Costs 2000 Expected Rate of Return 0.16 22 1 23 2 3000 0.15 Accept Project? Y/N =IF(C22>$D$18, "Y","N") =IF(C23>$D$18, "Y", "N") =IF(C24>$D$18,"Y","N") =IF(C25>$D$18, "Y", "N") 24 3 5000 2000 0.1375 0.125 25 4

Y - Accept the Project

N - Reject

(In case of any further clarification please comment)