11. Problem 10.18 (WACC and Optimal Capital Budget) BE eBook Problem Walk-Through Adamson Corporation is considering fou

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11 Problem 10 18 Wacc And Optimal Capital Budget Be Ebook Problem Walk Through Adamson Corporation Is Considering Fou 1 (51.11 KiB) Viewed 15 times

11. Problem 10.18 (WACC and Optimal Capital Budget) BE eBook Problem Walk-Through Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return Cost $2,000 16.00% 15.00 3,000 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $54.00 per share. Also, its common stock currently sells for $45.00 per share; the next expected dividend, D₁, is $3.75; 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. 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: % Cost of preferred stock: Cost of retained earnings: b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. Project 1 2 3 4 % -Select- ✔ -Select- ✓ -Select- ✓ -Select- ✓ % c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Project 3 Project 4