Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd= 11% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its lastdividend (Do) was $1.75, its expected constant growth rate is 3%, and its common stock sells for $26. EEC's tax rate is 25%.Two projects are available: Project A has a rate of return of 14%, and Project B's return is 8%. These two projects are equallyrisky and about as risky as the firm's existing assets.a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places..66%b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.%c. Which projects should Empire accept?Project A V

Weighted average cost of capital is termed as overall cost of capital of the company because it…

Answered: Empire Electric Company (EEC) uses only…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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eBook Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $2.05, its expected constant growth rate is 4%, and its common stock sells for $26. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 13%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. % Which projects should Empire accept?
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (D 0) was $2.55, its expected constant growth rate is 3%, and its common stock sells for $ 22. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.
3
Suppose there are two alternatives to finance a power generation project planned by ABC (Pvt.) Ltd. Alternative A is to financing the total capital of Rs. 450 Mn with equity and Alternative B is to employ Rs.150 Mn equity, Rs. 100 Mn by 14% debentures and the rest by a 15% bank loan. The corporate tax rate is 30% and the owners expects 18% dividend in both alternatives. Earnings before interest and tax (EBIT) for the project is estimated as Rs.250 Mn. a. Calculate weighted average cost of capital (WACC) for both alternatives.
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (D0) was $3.45, its expected constant growth rate is 3%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. % Which projects should Empire accept? -Select-Project A? Project B?
ABC collmpany uses only debt equity. It can borrow unlimited at an interest rate of 10% as long as it finances At its target capital structure, which calls for 50% debt and 50% equity. Its last dividend was $1.46, it's expected constant growth rate is 8% and it's stock still sells for $24. ABC companies tax rate is 21%. Four projects are available project A cost $250 million in return = 13% project B cost 125 milion return = 12% project C cost $200 million and return = 11% project D cost $150 million and return = 10%. 1a) what is ABC Companys cost of common stock? 1b) What is ABC Company's WACC? 1c) What should be the optimal budget?
ASAP!! IN 20 minns Karachi Electric Supply Company (KESC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 11 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was Rs 12, its expected constant growth rate is 4 percent, and its stock sells at a price of Rs. 50. KESC’s tax rate is 40 percent. Two projects are available: Project A has a rate of return of 13 percent, while Project B has a rate of return of 10 percent. All of the company’s potential projects are equally risky and as risky as the firm’s other assets. What is KESC’s cost of common equity? What is KESC’s WACC? c. Which projects should KESC’s select? and why?
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its last dividend (Do) was $2.60, its expected constant growth rate is 4%, and its common stock sells for $30. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 11%, and Project B's return is 10%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. -Select- % c. Which projects should Empire accept?
(b) Iron Corporation currently has no debt on its balance sheet. Iron's marginal tax rate is 30% and the cost of debt is 7%. () If Iron were to issue sufficient debt to reduce its taxes by $100 million per year permanently, how much debt would Iron need to issue? What would be the value of the tax shield? (i) Iron plans to borrow $5 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Investors pay a tax rate of 35% on their interest income and 15% on their income from capital gains and dividends. Calculate the present value of the interest tax shield from this recapitalization from an investor's perspective.

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