Expected Rate of ReturnAdamson Corporation is considering four average-risk projects with the following costs and rates of return:ProjectCost1$2,00023,0003416.00%15.005,0002,00013.7512.50The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $51.00 per share. Also, itscommon stock currently sells for $34.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structureconsists 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-Project 2-Select-Project 3-Select-Project 4-Select- ✓

Step 1: Calculate the after-tax cost of debt using the formula rd∗(1−taxrate)10% × (1-0.25) = 7.5%…

Answered: Expected Rate of Return Adamson…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 11P

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Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Cost Expected Rate of Return $2,000 16.00% 3,000 15.00 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.0 per year at $60.00 per share. Also, its common stock currently sells for $52.00 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. Project 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: 123 % Project 1 Project 2 Project 3 Project 4 Cost of preferred stock: Cost of retained earnings: b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two…
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project 1 2 3 4 $2.000 Open spreadsheet Cost Cost of debt 3,000 5,000 2.000 Project 1 Project 2 Project 3 Project 4 Expected Rate of Return 16.00% The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, common stock currently sells for $33 per share; the next expected dividend, D₂, is $4.00; 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. The data has been collected in the Microsoft Excel Online e below. Open the spreadsheet and perform the required analysis to answer the questions below. % 15.00 a. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate…
Suppose Mullens Corporation is considering three average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,500 21.00% $3,000 $2,750 2 3 28.00% 29.00% Mullens estimates that it can issue debt at a rate of ra = 15.00% and a tax rate of T = 10.00%. It can issue preferred stock that pays a constant $200.00 per share. dividend of Dp = : $20.00 per year and at Pp = Also, its common stock currently sells for Po $20.00 per share. The expected dividend payment of the common stock is D₁ dividend is expected to grow at a constant annual rate of g = 5.00% per year. Mullens' target capital structure consists of Ws = 75.00% common stock, wd = 15.00% debt, and wp = 10.00% preferred stock. According to the video, the after-tax cost of debt can be stated as approximately According to the video, the cost of preferred stock can be stated as of approximately = $5.00 and the Plugging in the values for rd and (T) yields an after-tax cost of debt of…
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ix Browne, Incorporated estimates that its break point (BPRE) is $12 million, and its WACC is 9.8 percent if common equity comes from retained earnings. However, if the company issues new stock to raise new common equity, it estimates that its WACC will rise to 10.8 percent. The company is considering the following equal-life investment projects: Project A B с D Size $4 million 6 million 3 million 5 million What is the firm's optimal capital budget? a. $10 million b. $13 million c. $15 million d. $18 million e. None of the above IRR 11.4% 11.9 10.1 10.3
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