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Midwest Electric Company (MEC) 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 targetcapital structure, which calls for 45% debt and 55% common equity. Its last dividend D0 was $2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC’stax

Midwest Electric Company (MEC) 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 targetcapital structure, which calls for 45% debt and 55% common equity. Its last dividend D0 was $2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC’stax

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Midwest Electric Company (MEC) 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 targetcapital structure, which calls for 45% debt and 55% common equity. Its last dividend D0 was $2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC’stax rate is 40%. Two projects are available: Project A has a rate of return of 13%, and Project B’s return is 10%. These two projects are equally risky and about as risky as the firm’sexisting assets.
a. What is its cost of common equity? b. What is the WACC? c. Which projects should Midwest accept?

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