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 per share; the next expected dividend, D1, is $3.50; 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.
Solution:
a)Calculation of cost of each of the capital components:
i)Cost of debt
=rd(1-tax rate)
=9%(1-0.30)
=6.30%
ii)Cost of preferred stock(Kp)
Kp=[Dividend/Share Price]*100
=[$4/$47]*100
=8.51%
iii)Cost of retained earning(Ke)
Ke=[D1/Share Price]+Growth rate
=[$3.5/$36]+0.07
=0.1672 or 16.72%
b)Calculation of WACC
WACC=Sum of (Cost of each component of capital*Weight)
=16.72%*0.75+8.51%*0.10+6.30%*0.15
=12.54%+0.851+0.945
=14.336% or 14.34%
c)Project 1 and 2 should be accepted as they have expected return higher than WACC(14.34%).Remaining Projects have lower expected return,thus they should be rejected.
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project...
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 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 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 = 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 = 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 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 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 $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 = 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...