What is the cost of each of the capital components

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Reference no: EM132001038

Adamson 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 = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $3 per year at $48 per share. Also, its common stock currently sells for $34 per share; the next expected dividend, D1, is $4.00; and the dividend is expected to grow at a constant rate of 5% 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? Round your answers to two decimal places. Do not round your intermediate calculations.

Cost of debt _____ %

Cost of preferred stock_________ %

Cost of retained earnings________ %

B. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. _______%

C. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?

Project 1 ACCEPT OR REJECT?

Project 2 ACCEPT OR REJECT?

Project 3 ACCEPT OR REJECT?

Project 4 ACCEPT OR REJECT?

Reference no: EM132001038

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