Question

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 per share; the next expected dividend, D1, is $4.00; 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. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. 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 % What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. % Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 _______ Project 2 _______ Project 3 _______ Project 4 _______

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 ra = 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. Als common stock currently sells for $37 per share; the next expected dividend, D1, is $4.00; and the dividend is expected to grow at a constant rate of 7% per year. The target capital stru consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet 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 %

Answer 1

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C w ENG 04:41 01-08-2020 66 35 X AE34 . Y N AA AB AC AD AE AF 33 ANS A kd = 9%(1-0.35) 5.85% 34 kd = 5.85% 35 36 kp = D/PO kp = 3/57 = 5.2632% 5.26% 37 38 39 40 ke = D1/PO+g ke = 4/37 + 0.07 ke = 41 17.8108% 17.81% 42 43 ANS B WACC A B C 44 45 46 SOURCE COMMON STOCK WEIGHT 75% 15% COC (%) 17.81% 5.85% 5.26% B*C WEIGHTED COST 13.358% 0.878% 0.526% 14.76% 47 DEBT PREFERRED STOCK 48 10% WACC = 49 50 51 52 ANS C PROJECT EXPECTED RATE OF RETURN WACC REASON SELECTION ACCEPT 1 14.76% RETURN > WACC 53 2 16.00% 15.00% 13.75% 12.50% 14.76% 14.76% ACCEPT REJECT 3 54 55 56 RETURN > WACC RETURN < WACC RETURN < WACC 4 14.76% REJECT KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +