Equally risky and about risky as the firm existing assets

Assignment Help Financial Management

Reference no: EM131073226

Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $2.40, its expected constant growth rate is 4%, and its common stock sells for $24. 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 8%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Round your answer to two decimal places. % What is the WACC? Round your answer to two decimal places. % Which projects should Midwest accept, A or B?

Reference no: EM131073226

Questions Cloud

What is the capital structure weight of the firm debt : What does a negative covariance between two assets imply? Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. What is the capital structure weight of the firm's debt?

Best describes the risk measure known as beta : Which of the following best describes the risk measure known as beta? Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. What is the firm's weighted average cost of capital..

Best defines the term dividend record date : Which of the following best defines the term “dividend record date”?

What is the firm cost of equity : Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D1, to be $2.50 and it expects dividends to grow at a..

Equally risky and about risky as the firm existing assets : Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. These two project..

What is breakeven stock price-call option on stock : A one-year call option on a stock with strike price of $45 cost $5 and a one-year put option on a stock with strike price of $35 cost $3. A trader shorts two put options and shorts one call option. What is the breakeven stock price, below which the t..

Costs are expected to increase : A printing press was purchased 4 years ago for $100,000. The current market value is $45,000, which will decline as follows over the next 5 years: $40,000, $33,500, $28,000, $24,000, and $17,000. The O & M costs are estimated to be $16,000 this year...

What is after-tax cost of debt : The Heuser Company's currently outstanding bonds have a 9% coupon and a 14% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is Heuser's after-tax..

What is its cost of common equity : The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 5% per year. Carpetto's common stock currently sells for $26.25 per share; its last dividend was $1.80; and it will pay a $1.89 dividend at the ..

User Account

All Pages