Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 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 $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and 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? 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?

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
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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 = 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 $2.60, its expected constant growth rate is
4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A
has a rate of return of 11%, and 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? 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?
Transcribed Image Text:Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 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 $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and 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? 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?
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