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Adamson Corporation is considering four average-risk projects with the following costs and rates of retur: Project 2 3 Cost $2.000 3,000 5,000 2,000 Open spreadsheet Expected Rate of Return 16.00% 15.00 13.75 The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, D₁, is $4.00; 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. 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. % 12.50 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. % % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Project 3 Project 4

Adamson Corporation is considering four average-risk projects with the following costs and rates of retur: Project 2 3 Cost $2.000 3,000 5,000 2,000 Open spreadsheet Expected Rate of Return 16.00% 15.00 13.75 The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, D₁, is $4.00; 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. 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. % 12.50 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. % % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Project 3 Project 4

Essentials Of Investments
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
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# Analysis of Adamson Corporation's Project Options Adamson Corporation is evaluating four projects, each with different costs and expected 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% | ### Financial Assumptions - **Debt Issuance:** The company can issue debt at a rate of \( r_d = 9\% \) with a tax rate of 30%. - **Preferred Stock:** Issued at a constant dividend of $5 per year for $44 per share. - **Common Stock:** Currently sells for $33 per share with an expected dividend (\( D_1 \)) of $4.00, growing at 5% per year. - **Capital Structure:** 75% common stock, 15% debt, and 10% preferred stock. The data for analysis has been prepared in a Microsoft Excel Online file. [Open spreadsheet](#) ### Required Calculations **a. Calculate the Cost of Each Capital Component** Round your answers to two decimal places without rounding intermediate values. - **Cost of debt:** [Input box] % - **Cost of preferred stock:** [Input box] % - **Cost of retained earnings:** [Input box] % **b. Determine Adamson's Weighted Average Cost of Capital (WACC)** Round your answer to two decimal places without rounding intermediate values. - WACC: [Input box] % **c. Evaluate Projects Against WACC** Only projects exceeding the WACC will be accepted. Select which projects Adamson should accept. - Project 1 [Dropdown: Yes/No] - Project 2 [Dropdown: Yes/No] - Project 3 [Dropdown: Yes/No] - Project 4 [Dropdown: Yes/No] Through careful evaluation and financial analysis, Adamson Corporation can make informed decisions on which projects to pursue based on calculated returns and strategic capital allocation.
Transcribed Image Text:# Analysis of Adamson Corporation's Project Options Adamson Corporation is evaluating four projects, each with different costs and expected 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% | ### Financial Assumptions - **Debt Issuance:** The company can issue debt at a rate of \( r_d = 9\% \) with a tax rate of 30%. - **Preferred Stock:** Issued at a constant dividend of $5 per year for $44 per share. - **Common Stock:** Currently sells for $33 per share with an expected dividend (\( D_1 \)) of $4.00, growing at 5% per year. - **Capital Structure:** 75% common stock, 15% debt, and 10% preferred stock. The data for analysis has been prepared in a Microsoft Excel Online file. [Open spreadsheet](#) ### Required Calculations **a. Calculate the Cost of Each Capital Component** Round your answers to two decimal places without rounding intermediate values. - **Cost of debt:** [Input box] % - **Cost of preferred stock:** [Input box] % - **Cost of retained earnings:** [Input box] % **b. Determine Adamson's Weighted Average Cost of Capital (WACC)** Round your answer to two decimal places without rounding intermediate values. - WACC: [Input box] % **c. Evaluate Projects Against WACC** Only projects exceeding the WACC will be accepted. Select which projects Adamson should accept. - Project 1 [Dropdown: Yes/No] - Project 2 [Dropdown: Yes/No] - Project 3 [Dropdown: Yes/No] - Project 4 [Dropdown: Yes/No] Through careful evaluation and financial analysis, Adamson Corporation can make informed decisions on which projects to pursue based on calculated returns and strategic capital allocation.
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