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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
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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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? CS Scanned with CamScanner
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? CS Scanned with CamScanner
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