Given:
Rate of Debt = 10%
Tax Rate = 30%
Cost of Debt = 10%(1-0.30) = 7%
Given
Dividend for preferred stock = $4
Price of Stock = $42
Cost of Preferred Stock = 4/42 = 0.0952 = 9.52%
Given
Price of Equity P0 = $37
Dividend D1 = $ 3.75
Growth g = 7%
Cost of Retained earning = D/P+g = 3.75/37+0.07 = 0.1714 = 17.14%
b. Calculation of Weighted Average cost of capital
Particulars | After tax cost | Weight | WAC |
Debt | 0.07 | 0.15 | 0.0105 |
Preferred Stock | 0.0952 | 0.10 | 0.00952 |
Common Stock | 0.1714 | 0.75 | 0.12855 |
0.14857 |
Weighted Average cost of capital = 14.86%
C. Project 1 & 2 should be accepted.
WACC and optimal capital budget Adamson Corporation is considering four average-risk projects with the following costs...
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IDTAP WACC and optimal capital budget Q Search the Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Expected Rate of Return 16.00% Cost $2,000 3,000 5,000 2,000 15.00 13.75 12.50 The company estimates that it can issue debt at a rate of -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...
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