Question

Problem 10-12 WACC Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd 11% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (Do) was $2.50, its expected constant growth rate is 4%, and its common stock sells for $24. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 13%, and Project B's return is 11%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations. b. What is the WACC7 Round your answer to two decimal places. Do not round your intermediate calculations. c. Which projects should Empire accept? elect- Project Project B

Answer 1

D1/(ke-g) $24 Price 4.00% g= $2.600 2.5*1,04 D1 Кe -g%3 10.83% Кe 3 14.83% 14.83% Cost of equity cost of debt 6.60% [0.11 0.6 Particulars weighted cost weight cost 55% 14.83% Equity 0.08158 Debt 45% 6.60% 0.02970 11.13% WACC project A Ассеpt