. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: 6.75 % Cost of preferred stock: 10.20 % Cost of retained earnings: 14.67 % . What is Adamson's WACC? Do not round intermediate calculations. Round your answer to tuo desim nlngon

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 11P
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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 25%.
It can issue preferred stock that pays a constant dividend of $5.00 per year at $49.00 per
share. Also, its common stock currently sells for $42.00 per share; the next expected
dividend, D1, is $4.25; 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.
a. What is the cost of each of the capital components? Do not round intermediate
calculations. Round your answers to two decimal places.
Cost of debt:
6.75
%
Cost of preferred stock:
10.20
%
Cost of retained earnings:
14.67
%
b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer
to two decimal places.
13.04
%
Transcribed Image Text: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 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $49.00 per share. Also, its common stock currently sells for $42.00 per share; the next expected dividend, D1, is $4.25; 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. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: 6.75 % Cost of preferred stock: 10.20 % Cost of retained earnings: 14.67 % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. 13.04 %
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