Adamson Corporation is considering four average-risk projects with the following costs and rates of retur: Project 2 3 Cost $2.000 3,000 5,000 2,000 Open spreadsheet Expected Rate of Return 16.00% 15.00 13.75 The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, D₁, is $4.00; and the dividend is expected to grow at a constant rate of 5% 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. % 12.50 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
Adamson Corporation is considering four average-risk projects with the following costs and rates of retur: Project 2 3 Cost $2.000 3,000 5,000 2,000 Open spreadsheet Expected Rate of Return 16.00% 15.00 13.75 The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, its common stock currently sells for $33 per share; the next expected dividend, D₁, is $4.00; and the dividend is expected to grow at a constant rate of 5% 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. % 12.50 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
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 22P
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Transcribed Image Text:Adamson Corporation is considering four average-risk projects with the following costs and rates of return:
Project
1
2
3
4
$2.000
Open spreadsheet
Cost
Cost of debt
3,000
5,000
2.000
Project 1
Project 2
Project 3
Project 4
Expected Rate of Return
16.00%
The company estimates that it can issue debt at a rate of r = 9%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5 per year at $44 per share. Also, common stock currently sells for $33 per share; the next
expected dividend, D₂, is $4.00; and the dividend is expected to grow at a constant rate of 5% 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 e below. Open the spreadsheet and perform the required analysis to answer the questions below.
%
15.00
a. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations.
13.75
12.50
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?
0000
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