Question

Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project...

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 = 11%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $47.00 per share. Also, its common stock currently sells for $33.00 per share; the next expected dividend, D1, is $3.75; 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.

  1. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places.

    Cost of debt: %

    Cost of preferred stock: %

    Cost of retained earnings: %

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

    %

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

    Project 1 -Select-AcceptReject
    Project 2 -Select-AcceptReject
    Project 3 -Select-AcceptReject
    Project 4 -Select-AcceptReject

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