Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return 16.00% 15.00 13.75 2,000 12.50 = 11%, and its tax rate is 25%. It can The company estimates that it can issue debt at a rate of ra issue preferred stock that pays a constant dividend of $6.per year at $60.00 per share. Also, its common stock currently sells for $52.00 per share; the next expected dividend, D₁, is $5.75; 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. Project 1 234 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: % Project 1 Project 2 Project 3 Project 4 Cost $2,000 3,000 5,000 % 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. % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? % -Select- -Select- V -Select- v -Select-
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return 16.00% 15.00 13.75 2,000 12.50 = 11%, and its tax rate is 25%. It can The company estimates that it can issue debt at a rate of ra issue preferred stock that pays a constant dividend of $6.per year at $60.00 per share. Also, its common stock currently sells for $52.00 per share; the next expected dividend, D₁, is $5.75; 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. Project 1 234 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: % Project 1 Project 2 Project 3 Project 4 Cost $2,000 3,000 5,000 % 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. % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? % -Select- -Select- V -Select- v -Select-
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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![Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
| 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 \( r_d = 11\%\), and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $60.00 per share. Also, its common stock currently sells for $52.00 per share; the next expected dividend, \( D_1 \), is $5.75; 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.
### Questions:
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.
- WACC: \_\_\_\_%
c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
- Project 1: \[Select\]
- Project 2: \[Select\]
- Project 3: \[Select\]
- Project 4: \[Select\]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9336b0a8-199d-485e-9442-5d0fe1f82213%2Fb8cc5ac0-47e9-4164-9422-c7d58454b339%2F32zfwfs_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
| 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 \( r_d = 11\%\), and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $60.00 per share. Also, its common stock currently sells for $52.00 per share; the next expected dividend, \( D_1 \), is $5.75; 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.
### Questions:
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.
- WACC: \_\_\_\_%
c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
- Project 1: \[Select\]
- Project 2: \[Select\]
- Project 3: \[Select\]
- Project 4: \[Select\]
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