Question

Q Search this ca apter 10 End-of-Chapter Problems Problem Walk-Through Problem 10-18 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 $2,000 16.00% 3,000 15.00 5,000 13.75 2,000 12.50 ReadSpeak The company estimates that it can issue debt at a rate of rd - 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $49 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, Di, Is $3.00; 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? Round your answers to two decimal places. Do not round your intermediate calculations. Cost of debt % Cost of preferred stock Cost of retained earnings b. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations 2:12 PM C. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept o Eten be

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ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = A Wrap Text Merge & Center - BIU - D $ :.: Insert Delete Format % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells E Copy Paste Format Painter Clipboard AD41 Y 33 AA АС AD AE AF Z ANS A AG kd = kd = AB 10%(1-0.30) 7.00% 34 kp = D/PO kp = 5/49 10.2041% ke = D1/P0 + 8 ke = 3/33 +0.07 ke = 41 16.0909% ANS B WACC WEIGHT SOURCE COMMON STOCK DEBT PREFERRED STOCK 75% 15% 10% COC (%) 16.0909% 7.00% 10.2041% B*C WEIGHTED COST 12.068% 1.050% 1.020% WACC = 14.14% 52 K M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio RESI el KE CAPM UTILITY, SHARPE, beta ferences: CF135 cap stru WACC BOJ 120% Rea 1 DO B "All 4 * 4 e ENG 21-11-2019

ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = A Wrap Text Merge & Center - BIU - D $ % , :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Number Cells Z AA AB AC AD AE AF AG ANSC PROJECT WACC EXPECTED RATE OF RETURN 16% E Copy Paste Format Painter Clipboard AD60 Y 52 53 54 55 56 57 58 59 60 61 62 63 64 65 15% 13.75% 12.50% SELECTION 14.14% ACCEPT 14.14% ACCEPT 14.14% REJECT 14.14% REJECT REASON RETURN > WACC RETURN > WACC RETURN <WACC RETURN <WACC 70 71 HI Red M convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: CF135 cap stru WACC BOJ 120% RESI el 0 + DO B "All 4 * 4 e ENG 21-11-2019