Solution a | ||||
Cost of individual components | ||||
Cost of debt | 10% | |||
Tax rate | 25% | |||
After-tax cost of debt | =10%*(1-25%) | |||
The after-tax cost of debt | 7.50% | |||
Preference dividend | $ 6.00 | |||
Share price | $ 45.00 | |||
Cost of preference stock | 6/45 | |||
Cost of preference stock | 13.33% | |||
Equity share price | $ 38.00 | |||
Net dividend-D1= | $ 4.25 | |||
Dividend growth rate | 5% | |||
Share price= | Next dividend/(Cost of equity-growth rate) | |||
38= | 4.25/(Cost of equity-5%) | |||
(Cost of equity-5%)= | 4.25/38 | |||
(Cost of equity-5%)= | 11.18% | |||
Cost of equity= | 16.18% | |||
Solution b | ||||
Calculation of WACC | ||||
Cost | Weight | Weighted cost | ||
A | B | C=A*B | ||
Debt | 7.50% | 15.00% | 1.13% | |
Preferred stock | 13.33% | 10.00% | 1.33% | |
Equity stock | 16.18% | 75.00% | 12.14% | |
Total capital | Total WACC | 14.60% | ||
Solution C | ||||
Project | Return | WACC | Selection | |
1 | 16.00% | 14.60% | Selected | |
2 | 15.00% | 14.60% | Selected | |
3 | 13.75% | 14.60% | Rejected | |
4 | 12.50% | 14.60% | Rejected | |
Project Cost Expected Rate of Return 1 $2,000 16.00% 3,000 15.00 5,000 13.75 4 2,000 12.50...
Project Cost Expected Rate of Return $2,000 16.00% 1 2 15.00 3 4 13.75 3,000 ,000 ,000 5 2 12.50 The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $50 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $4.50; and the dividend is...
tion 1 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 re-9, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $3 per year at $49 per share. Also, its common stock currently sells for $30 per share the next expected dividend, D, is $3.25; and the dividend is expected to...
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Cost Expected Rate of Return A $2,000 16.00% 3,000 15.00 5,000 13.75 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 $51.00 per share. Also, its common stock currently sells for $35.00 per share;...
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 $57.00 per share. Also, its common stock currently sells for $45.00...
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 16.00% 15.00 $2,000 3,000 5,000 2,000 13.75 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $47.00 per share. Also, its common stock currently sells for $35.00 per share; the next...
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 $57 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 returns Project Cost Expected Rate of Return 16.00% 15.00 $2,000 3,000 5,000 2,000 13.75 12.50 The company estimates that it can issue debt at a rate of rg 11%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $3 per year at $56 per share. Also, its common stock currently sells for $35 per share the next expected...
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 $4 per year at $51 per share. Also, its common stock currently sells for $33...
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 $4 per year at $47 per
share. Also, its common stock currently sells for $36...
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 $2,000 16.00% 3,000 15.00 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate ofre -10%, and its tax rate is 30%. 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 $37 per...