Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd 5 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EEC’s tax rate is 40%. Two projects are available: Project A has a rate of return of 12% and Project B’s return is 11%. 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 Empire accept?
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd 5 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EEC’s tax rate is 40%. Two projects are available: Project A has a rate of return of 12% and Project B’s return is 11%. 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 Empire 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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Empire Electric Company (EEC) uses only debt and common equity. It can borrow
unlimited amounts at an interest rate of rd 5 9% as long as it finances at its target capital
structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was
$2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EEC’s tax
rate is 40%. Two projects are available: Project A has a
return is 11%. These two projects are equally risky and about as risky as the firm’s existing
assets.
a. What is its
b. What is the WACC?
c. Which projects should Empire accept?
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