Question

Video Excel Online Structured Activity: WACC and optimal capital budget Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Expected Rate of Return 16.00% 15.00 13.75 12.50 Project Cost $2,000 3,000 5,000 2,000 2 4 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 year at $60 per share. Also, its common stock currently sells for $37 per share; the next expected dividend, D1, is $4.25; and the dividend is expectedt a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been coll 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 b. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. ar at $60 per share. Also, its common stock currently sells for $37 per share; the next expected dividend, D, is $4.25; and the dividend is expected to gro constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt and 10% preferred stock. The data has been collected i e 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 b. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Project 3 Project 4 Microsoft Reset Problem Check My Work Ne Back MINDTAP ctivity: WACC and optimal capital budget Video Excel Online Structured Activity: WACC and optimal capital budget Adamson Corporation is considering four average-risk projects with the following costs and rates of return Expected Rate of Return 16.00% 15.00 13.75 12.50 Cost $2,000 3,000 5,000 2,000 Project 2 4 The company estimates that it can issue debt at a rate of rd-996, and its tax rate is 30%, It can issue preferred stock that pays a constant dividend of $3 per year at $60 per share. Also, its common stock currently sells for $37 per share; the next expected dividend, Di, is s4.25; and the dividend is expected to grow at a constant rate of 6% 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. 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 b. 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? c. pays a constant dividend of $3 per The company estimates that it can issue debt at a rate of rd-996, and its tax rate is 30%. It can issue preferred stock that year at $60 per share. Also, its common stock currently sells for $37 per share; the next expected dividend, D, is $4.25; and the dividend is expected to grow a of 6% per year. The target capital structure consists of 75% common stock 15% debt and 10% preferred stock. The data has been collected in a constant rate the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below Open spreadsheet capital components? Round your answers to two decimal places. Do not round your intermediate calculations. a. What is the cost of each of the Cost of debt Cost of preferred stock Cost of retained earnings b. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations. c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept? Project 1 Project 2 Project 3 Project 4 Check My Work Reset Problem 7:45 PM /30/2015

Answer 1

As per rules I am answering the first 4 subparts of the question

1: Cost of debt = rd*(1-Tax)

= 9%*(1-0.3)

= 6.3%

2: Cost of preferred stock = Dividend / Price

= 3/60

= 5%

3: Cost of retained earnings = D1/Price + g

= 4.25/ 37+ 6%

=17.49%

4: WACC = Sum of weights*costs

= 6.3%*15% + 5%*10%+ 17.49%*75%

=14.56%