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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A firm wants to fund a $7 million project by raising both short-term and long-term debt. Because short-term debt is less risky, its cost is 5%. The long-term debt (bond) must pay 5.5% annual coupons. If the firm raises $5 million in short-term debt and the remainder in long-term debt, what is this project's WACC? Assume the tax rate = 26%. a. 5.14% b. 3.81% c. 3.89% d. 5.25% e. 1.34%
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Baghiben
Consider a project to produce solar water heaters. It requires a $10 million investment and offers a level after-tax cash flow of $1.68 million per year for 10 years. The opportunity cost of capital is 11.15%, which reflects the project's business risk. a. Suppose the project is financed with $4 million of debt and $6 million of equity. The interest rate is 7.15% and the marginal tax rate is 21%. An equal amount of the debt will be repaid in each year of the project's life. Calculate APV. (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole number.) X Answer is complete but not entirely correct. Adjusted present value S 120,980 x b. If the firm Incurs issue costs of $610,000 to raise the $6 million of required equity, what will be the APV? (Enter your answer in dollars, not millions of dollars. Do not round Intermediate calculations. Round your answer to the nearest whole number. Negative amount shoud be…
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