2,000 12.50 The company estimates that it can issue debt at a rate of r 10%, and its tax rate is 30%. If can issue preferred stock that pays a constant dividend of $5.00 per year at $50.00 per share. Also, its common stock currently sells for $38.00 per share; the next expected dividend, D,, is $4.25, and the dividend is expected to grow at a constant rate of 5% 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? b. What is Adamson's WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which proiects should Adamson accept?
2,000 12.50 The company estimates that it can issue debt at a rate of r 10%, and its tax rate is 30%. If can issue preferred stock that pays a constant dividend of $5.00 per year at $50.00 per share. Also, its common stock currently sells for $38.00 per share; the next expected dividend, D,, is $4.25, and the dividend is expected to grow at a constant rate of 5% 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? b. What is Adamson's WACC? c. Only projects with expected returns that exceed WACC will be accepted. Which proiects should Adamson accept?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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10-18 WACC AND OPTIMAL CAPITAL BUDGET Adamson Corporation is considering four
average-risk projects with the following costs and rates of return:
3
4
Project
Cost
Expected Rate of Return
6.
1
$2,000
16.00%
7
3,000
15.00
8
3
5,000
13.75
9.
2,000
12.50
10
11
The company estimates that it can issue debt at a rate of r, = 10%, and its tax rate is 30%. If
can issue preferred stock that pays a constant dividend of $5.00 per year at $50.00 per share.
Also, its common stock currently sells for $38.00 per share; the next expected dividend, D,
is $4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target
capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
12
13
14
15
16
a. What is the cost of each of the capital components?
b. What is Adamson's WACC?
c. Only projects with expected returns that exceed WACC will be accepted. Which
projects should Adamson accept?
17
18
19
20
21
P.
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