Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of ra = 10% as long as it finances at its target capital structure,which calls for 40% debt and 60% common equity. Its last dividend (Do) was $1.85, its expected constant growth rate is 5%, and its common stock sells for $22. EEC's tax rate is 25%. Twoprojects are available: Project A has a rate of return of 15%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets.a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places.%b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.-Select-%c. Which projects should Empire accept?

> Cost of equity, r = D0 x (1 + g) / P + g>Where,>P = Stock value>D0 = Current…

Answered: Empire Electric Company (EEC) uses only…

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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