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 |
---|---|---|
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 r_{d}=9 %, and its tax rate is 40 %. It can issue preferred stock that pays a constant dividend of $4 per year at $57 per share. Also, its common stock currently sells for $34 per share; the next expected dividend, D_{i}, is 43.25; and the dividend is expected to grow at a constant rate of 7 %per year. The target capital structure consists of 75 %common stock, 15 %debt, and 10 %preferred stock.
rate positively ..
Ans a) | Computation of cost of capital | ||||
cost of debt= | 5.40% | ||||
9*(1-40%) | |||||
Ans = | 5.40% | ||||
Cost of preferred stock | |||||
annual dividend/Price today | 7.02% | ||||
4/57 | |||||
Cost of retained earning | |||||
using DDM we can compute the cost of retained earning | |||||
Cost = | Dividend next year/Price today + growth rate | ||||
3.25/34+7% | |||||
16.56% | |||||
ans = | 16.56% | ||||
Ans b) | Computation of WACC | ||||
Source | weight | cost | Weight*cost | ||
cost of debt= | 15% | 5.40% | 0.81% | ||
Cost of preferred stock | 10% | 7.02% | 0.70% | ||
Cost of retained earning | 75% | 16.56% | 12.42% | ||
13.93% | |||||
ans = | 13.93% | ||||
Ans c) | Answer | ||||
Project 1 | ACCEPT | ||||
Project 2 | ACCEPT | ||||
Project 3 | REJECT | ||||
Project 4 | REJECT |
Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
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% 2 3,000 15.00 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate of ra = 11%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $57 per share. Also, its common stock currently sells for $31 per share; the...
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 40%. It can issue
preferred stock that pays a constant dividend of $5 per year at $53
per share. Also, its common stock currently sells for $40...
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 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 =
11%, and its tax rate is 35%. It can issue preferred stock that
pays a constant dividend of $6 per year at $59 per share. Also, its
common stock currently...
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 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...
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 $5 per year at $57 per share. Also, its common stock currently sells for $40...