WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r, 10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (Do) was $2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 13%, while Project B's retum is 10%. These two projects are equally risky and about as risky as the firm's existing assets. а. What is its cost of common equity? What is the WACC? E Which projects should Midwest accept?
WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r, 10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (Do) was $2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 13%, while Project B's retum is 10%. These two projects are equally risky and about as risky as the firm's existing assets. а. What is its cost of common equity? What is the WACC? E Which projects should Midwest 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
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Transcribed Image Text:WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow
unlimited amounts at an interest rate of ra
structure, which calls for 45% debt and 55% common equity. Its last dividend (Do) was $2, its
expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40%
Two projects are available: Project A has a rate of returm of 13%, while Project B's retum is 10%.
These two projects are equally risky and about as risky as the firm's existing assets.
10% as long as it finances at its target capital
a.
What is its cost of common equity?
b. What is the WACC?
c. Which projects should Midwest accept?
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