10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the...
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10-18 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 50%
2 3,000 40
3 5,000 30
4 2,000 20
The company estimates that it can issue debt at a before-tax-cost of rd = 5%, and its tax rate is 30 percent. The company also can issue preferred stock a $100 per share, which pays a constant dividend of $5 per year. The companys common stock currently sells at $40 per share. The year-end dividend, D1, is expected to be $5.00, and the dividend is expected to grow at a constant rate of 5 percent per year. The companys capital structure consists of 50 percent common stock, 40 percent debt, and 10 percent preferred stock. (50 points)
What is the cost of each of the capital components?
What is Adams WACC?
Which projects should Adams accept?
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