EP FUNDAMENTALS OF FIN.MGMT.-MINDTAP
14th Edition
ISBN: 9781305672086
Author: Brigham
Publisher: CENGAGE L
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Chapter 10, Problem 18P
WACC AND OPTIMAL CAPITAL BUDGET Adams Corporation is considering four average-risk protects with the following costs and
| Project | Cost | Expected Rate of Return |
| 1 | $2,000 | 16.00% |
| 2 | 3,000 | 15.00 |
| 3 | 5,000 | 13.75 |
| 4 | 2,000 | 12.50 |
The company estimates that it can Issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue
- a. What is the cost of each of the capital components?
- b. What is Adams’ WACC?
- c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
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WACC AND OPTIMAL CAPITAL BUDGET
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Project
Cost
Expected Rate of Return
1
$2,000
16.00%
2
3,000
15.00
3
5,000
13.75
4
2,000
12.50
The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $59 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $4.00; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.Cost of debt %Cost of preferred stock %Cost of retained earnings %
What is Adamson's WACC? Round your answer to two decimal places. Do not round…
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
23.00%
2
$3,000
30.00%
3
$2,750
24.00%
Mullens estimates that it can issue debt at a rate of rd=20.00%rd=20.00% and a tax rate of T=25.00%T=25.00%. It can issue preferred stock that pays a constant dividend of Dp=$20.00Dp=$20.00 per year and at Pp=$200.00Pp=$200.00 per share.
Also, its common stock currently sells for P0=$16.00P0=$16.00 per share. The expected dividend payment of the common stock is D1=$4.00D1=$4.00 and the dividend is expected to grow at a constant annual rate of g=5.00%g=5.00% per year.
Mullens’ target capital structure consists of ws=75.00%ws=75.00% common stock, wd=15.00%wd=15.00% debt, and wp=10.00%wp=10.00% preferred stock.
1.According to the video, the after-tax cost of debt can be stated as ________________ . Plugging in the values for rdrd and (T)T yields an after-tax cost of…
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…
Chapter 10 Solutions
EP FUNDAMENTALS OF FIN.MGMT.-MINDTAP
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