1.
Tax rate = 30%
After Tax cost of Debt = Before tax cost of Debt*(1-tax rate)
= 5(1-0.30)
= 3.5%
2.).
WACC= (Weight of Debt)(Cost of Debt)+ (Weight of Preferred Stock)(Cost of Preferred Stock) (Weight of Equity)(Cost of Equity)
WACC = (0.40)(3.5%) + (0.10)(5%) + (0.50)(17.5%)
WACC = 1.4% + 0.50% + 8.75%
WACC = 10.65%
3). Project Adam should accept:-
Project | Cost | Expected rate of return | WACC | Return after WACC | Amount of Return |
1 | $2000 | 50% | 10.65% | 39.35% | $787 |
2 | $3000 | 40% | 10.65% | 29.35% | $880.5 |
3 | $5000 | 30% | 10.65% | 19.35% | $967.5 |
4 | $2000 | 20% | 10.65% | 9.35% | $187 |
Since, Project 3 provides better after amount of return on cost. Hence, Project 3 should be chosen.
10-18 WACC and optimal capital budget Adams Corporation is considering four average-risk projects with the following...
Problem 10-18 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 $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 ra = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $6 per year at $40 per share. Also, its common stock currently...
Problem 10-18 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 16.00% $2,000 3,000 15.00 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate of r-9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $59 per share. Also, its common stock currently sells for...
Problem 10-18 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 $2,000 1 16.00% 2 3,000 15.00 3 5,000 13.75 12.50 4 2,000 The company estimates that it can issue debt at a rate of rd10 % , and its tax rate is 30 %. It can issue preferred stock that pays a constant dividend of $4 per year at $49 per share....
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 $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 ofre -10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $4 per year at $42 per share. Also, its common stock currently sells for $37 per...
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 rd = 11%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $5 per year at $43 per share. Also, its common...
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 rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $54 per share. Also, its common...
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 rd = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $46 per share. Also, its common...
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 rd = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $4 per year at $60 per share. Also, its common...
y: 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 $2.000 16.00% 3,000 15.00 13.75 5,000 2,000 12.50 The company estimates that it can issue debt at a rate ofre=11%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $56 per share. Also, its common stock currently sells for $31 per...
y: 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 $2.000 16.00% 15.00 2 3 ,000 5,000 13.75 2,000 12.50 The company estimates that it can issue debt at a rate ofre=11%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $56 per share. Also, its common stock currently sells for...