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 $3 per year at $48 per share. Also, its common stock currently sells for $34 per share; the next expected dividend, D1, is $4.00; 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.
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 OR REJECT?
Project 2 ACCEPT OR REJECT?
Project 3 ACCEPT OR REJECT?
Project 4 ACCEPT OR REJECT?