Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amount at an interest rate of r
Posted: Tue Nov 16, 2021 7:47 am
Midwest Electric Company (MEC) uses only debt and common
equity. It can borrow unlimited amount at an interest rate of
rd=10% as long as it finances at its target capital
structure, which calls for 45% debt and 55% common equity. Its last
dividends (D0) 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 return is 10%. These two projects are equally
risky and about as risk as exiting assets.
equity. It can borrow unlimited amount at an interest rate of
rd=10% as long as it finances at its target capital
structure, which calls for 45% debt and 55% common equity. Its last
dividends (D0) 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 return is 10%. These two projects are equally
risky and about as risk as exiting assets.