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
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 22P
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