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Southeast Electric Company (SEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of 10% as long as it finances at its target capital structure, which calls for 45% debt and 55% equity. The last dividend SEC paid was $2, which grows at a constant rate of 4%. Market price of its common stock and tax rate are $20 and 40% respectively. SEC has two projects 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 risky as the firm's existing assets.
Problem (a) What is SEC's cost of common equity?
Problem (b) What is WACC?
Problem (c) Which project SEC should accept? Why?
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