eBook Problem Walk-Through Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project 1 Cost $2,000 2 3,000 3 4 5,000 2,000 Expected Rate of Return 16.00% 15.00 13.75 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $56.00 per share. Also, its common stock currently sells for $47.00 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. 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. % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 -Select- -Select- -Select- Project 2 Project 3 Project 4 -Select- 3333 Grade it Now Save & Continue Continue without saving
eBook Problem Walk-Through Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project 1 Cost $2,000 2 3,000 3 4 5,000 2,000 Expected Rate of Return 16.00% 15.00 13.75 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $56.00 per share. Also, its common stock currently sells for $47.00 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. 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. % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 -Select- -Select- -Select- Project 2 Project 3 Project 4 -Select- 3333 Grade it Now Save & Continue Continue without saving
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Problem Walk-Through
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Project
1
Cost
$2,000
2
3,000
3
4
5,000
2,000
Expected Rate of Return
16.00%
15.00
13.75
12.50
The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $56.00 per share. Also, its
common stock currently sells for $47.00 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.
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.
%
c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?
Project 1
-Select-
-Select-
-Select-
Project 2
Project 3
Project 4
-Select-
3333
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