Reference no: EM132503944
Morrison Company Limited (MCL) has four (4) investment projects with the following costs and expected rates of return. All projects are independent of each other.
The firm estimates that it can issue debt at before tax cost of 10%, and its tax rate is 30%. It can also issue preferred stock at $40 per share, which pays a constant dividend of $5 per year. MCL's stock currently sells for $36 per share. The yearend dividend is expected to be $3.50 and is expected to grow at a constant rate of 6%.
The company's capital structure consists of 75% common stock, 15% debt and 10% preferred stock.
Projects Cost Rate of Return
Project A $ 12,000.00 16.20%
Project B $13,000.00 15.40%
Project C $ 15,000.00 13.75%
Project D $12,000.00 12.50%
I. What is the cost of each of the capital components?
II. What is the WACC?
III. If all the projects are of average risk, which should MCL select?
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