Allah Dita and sons uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend was Rs 5, its expected constant growth rate is 4%, and its common stock sells for Rs 200. Their tax rate is 40%. Two projects are available: Project A has a rate of return of 13%, while Project B’s return is 10%. These two projects are equally risky and about as risky as the firm’s existing assets. a. What is its cost of common equity? b. What is the WACC? c. Which projects should Midwest accept?
Allah Dita and sons uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend was Rs 5, its expected constant growth rate is 4%, and its common stock sells for Rs 200. Their tax rate is 40%. Two projects are available: Project A has a rate of return of 13%, while Project B’s return is 10%. These two projects are equally risky and about as risky as the firm’s existing assets. a. What is its cost of common equity? b. What is the WACC? c. Which projects should Midwest 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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Allah Dita and sons uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend was Rs 5, its expected constant growth rate is 4%, and its common stock sells for Rs 200.
Their tax rate is 40%. Two projects are available: Project A has a
a. What is its
b. What is the WACC?
c. Which projects should Midwest accept?
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