Problem: WACC and optimal capital budget
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 $5 per year at $45 per share. Also, its common stock currently sells for $38 per share; the next expected dividend, D1, is $4.50; 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.
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 %
What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. %