WACC AND OPTIMAL CAPITAL BUDGET AAA Company is considering three independent, equally risky projects with the same initial cost and the following internal rates of return: Project 1 – 20%, Project 2 – 15%, Project 3 – 10%. The company estimates that it can issue debt at a rate of rd=12%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $10 per year at $50 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $6, and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 50% common stock, 20% debt, and 30% preferred stock
a. What is the after-tax cost of debt, cost of preferred stock and cost of common equity?
b. What is AAA’s WACC?
c. Which projects should the company accept?