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 rd = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $3 per year at $58 per share. Also, its common stock currently sells for $31 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 4% 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/reject
Project 2 _______accept/reject
Project 3 _______accept/reject
Project 4 _______accept/reject