Question

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 r_{d} = 9%, and its tax
rate is 35%. It can issue preferred stock that pays a constant
dividend of $4 per year at $41 per share. Also, its common stock
currently sells for $30 per share; the next expected dividend,
D_{1}, is $3.00; and the dividend is expected to grow at a
constant rate of 6% 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.

= _______%

Answer #1

**(a)** rd= 9 % and Tax Rate = 35 %

After-Tax Cost of Debt = kd = 9 x (1-0.35) = 5.85 %

Constant Preferred Stock Dividend = Dp = $ 4 and Price of Preferred Stock = $ 41

Cost of Preferred Stock = kp = Dp / Price = 4 /41 = 0.097561 or 9.7561 %

Expected Dividend = D1 = $ 3, Current Common Stock Proce = P0 = $ 30, Perpetual Growth Rate = g = 6 %

Cost of Common Stock = ke = (D1/P0) + g = (3/30) + 0.06 = 0.16 or 16 %

**(b)** Debt Proportion = D = 15 % or 0.15, Common
Stock Proportion = E = 75 % or 0.75 and Preferred Stock Proportion
= P = 10 % or 0.1

WACC = kd X D + ke X E + kp X P = 5.85 x 0.15 + 16 x 0.75 + 9.7561 x 0.1 = 13.853 % ~ 13.85 %

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 40%. It can issue
preferred stock that pays a constant dividend of $5 per year at $40
per share. Also, its common stock currently sells for $30...

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 $6.00 per year at
$49.00 per share. Also, its common stock currently sells for $32.00...

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
$60.00 per share. Also, its common stock currently sells for $46.00...

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 25%. It can issue preferred stock that
pays a constant dividend of $5.00 per year at $50.00 per share.
Also, its common stock currently sells for $33.00...

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 = 10%, and its tax rate is 40%. It can issue
preferred stock that pays a constant dividend of $6 per year at $60
per share. Also, its common stock currently sells for $38...

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
= 10%, and its tax rate is 40%. It can issue preferred stock that
pays a constant dividend of $4 per year at $45 per share. Also, its
common stock currently sells for $38...

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...

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 = 10%, and its
tax rate is 30%. It can issue preferred stock that pays a constant
dividend of $5 per year at $58 per share. Also, its common stock
currently sells for $37...

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 $4 per year at $51 per share. Also, its
common stock currently sells for $34...

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 = 10%, and its tax rate is 40%. It can issue
preferred stock that pays a constant dividend of $4 per year at $42
per share. Also, its common stock currently sells for $36...

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