Reference no: EM132051397
WACC and optimal capital budget
Adams 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 = 10%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $3 per year at $40 per share. Also, its common stock currently sells for $30 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 4% 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.
Cost of debt %
Cost of preferred stock %
Cost of retained earnings %
What is Adams' WACC? Round your answer to two decimal places.
Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
| Project 1 |
-Select-acceptrejectItem 5 |
| Project 2 |
-Select-acceptrejectItem 6 |
| Project 3 |
-Select-acceptrejectItem 7 |
| Project 4 |
-Select-acceptrejectItem 8 |
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