About as risky as the firm existing assets

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Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $2.60, its expected constant growth rate is 4%, and its common stock sells for $23. 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 11%. These two projects are equally risky and about as risky as the firm's existing assets.

Reference no: EM131072772

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