Question
In: Finance
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project...
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 40%. It can issue preferred stock that pays a constant dividend of $6 per year at $42 per share. Also, its common stock currently sells for $38 per share; the next expected dividend, D1, is $4.50; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
- 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: %
Cost of preferred stock: %
Cost of retained earnings: %
- What is Adamson's WACC? Do not round intermediate calculations.
Round your answer to two decimal places.
% - Only projects with expected returns that exceed WACC will be
accepted. Which projects should Adamson accept?
Project 1 accept/reject Project 2 accept/reject Project 3 accept/reject Project 4 accept/reject
Solutions
jeff jeffy answered 3 weeks agoRelated Solutions
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project...
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 25%. It can issue
preferred stock that pays a constant dividend of $5.00 per year at
$59.00 per share. Also, its common stock currently sells for $46.00...
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project...
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 40%. It can issue preferred stock that
pays a constant dividend of $5 per year at $45 per share. Also, its
common stock currently sells for $34...
Glencor is evaluating four average-risk projects with the following costs and rates of return: Project Cost...
Glencor is evaluating four average-risk projects with the
following costs and rates of return: Project Cost (R) Expected Rate
of Return
Project
Cost (R)
Expected Rate of Return
1
2000
16%
2
3000
15%
3
0
13,75%
4
2000
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 shares that
pays a constant dividend of R5.00 per year at R49.00 per share.
Also, its...
WACC and optimal capital budget Adamson Corporation is considering four average-risk projects with the following costs...
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 35%. It can issue preferred stock that
pays a constant dividend of $6 per year at $48 per share. Also, its
common...
GeoGrocers is considering the following independent, average-risk investment projects: Project Size of Project Project IRR Project...
GeoGrocers is considering the following independent,
average-risk investment projects: Project Size of Project Project
IRR Project A $1.0 million 12.0% Project B 1.2 million 11.5%
Project C 1.2 million 11.0% Project D 1.2 million 10.5% Project E
1.0 million 10.0% The company has a target capital structure that
consists of 50 percent debt and 50 percent equity. Its after-tax
cost of debt is 8 percent, its cost of equity is estimated to be
13.5 percent, and its net income is...
Seacera Tiles Corp is considering the following average risk projects for its next investment period: Project...
Seacera Tiles Corp is considering the following
average risk projects for its next
investment period:
Project IRR (%) Investment (RM)
A 11.90 2,000,000.00
B 11.25 2,500,000.00
C 12.17 3,000,000.00
D 11.72 1,500,000.00
E 11.03 2,000,000.00
Seacera has 10,000 bonds outstanding that were issued for 30 years
ten years ago at a par
value of RM1,000.00 and a coupon rate of 12%, with interest paid
semi-annually. Similar
bonds are now selling to yield 9%. Tax rate is 40%.
It issued 40,000...
The Glenn Corporation is considering a four-year project with the following data; What is the project...
The Glenn Corporation is considering a four-year project with
the following data; What is the project NPV using wacc of 5.4%?
Additional investment in fixed assets but no additional working
capital $100,000
Straight-line depreciation rate 25% but zero salvage value after
four years
Annual sales revenues (constant for every year) $75,000
Operating costs (excl. depreciation) (also constant) $25,000
Tax rate 21.0%
The Brookfield Corporation is considering a four-year project with the following data; What is the project...
The Brookfield Corporation is considering a four-year project
with the following data; What is the project NPV using wacc of
11.3%?
Additional investment in fixed assets but no additional working
capital $100,000
Straight-line depreciation rate 25% but zero salvage value after
four years
Annual sales revenues (constant for every year) $75,000
Operating costs (excl. depreciation) (also constant) $25,000
Tax rate 21.0%
Trumbull Inc. has $4.8 million EBIT, $1.2 million
depreciation, a tax rate of .4, a capital expenditure of $0.7
million,...
You are considering the following two mutually exclusive projects. The required return on each project is...
You are considering the following two mutually exclusive
projects. The required return on each project is 14 percent. Which
project should you accept and what is the best reason for that
decision?
Year
Project A
Project B
0
−$
24,000
−$
21,000
1
9,500
6,500
2
16,200
9,800
3
8,700
15,200
Project A; because it pays back faster
Project A; because it has the higher profitability index
Incorrect
Project B; because it has the higher profitability index
Project B; because...
Q Corporation is considering investing in the following projects: Project A Project B Initial cash outlay...
Q Corporation is considering investing in the following
projects:
Project A
Project B
Initial cash outlay
$(200,000)
$(140,000)
Future cash inflows:
Year 1
$ 50,000
$ -
Year 2
50,000
-
Year 3
50,000
-
Year 4
50,000
40,000
Year 5
50,000
90,000
Year 6
50,000
140,000
Total cash inflows
$300,000
$ 270,000
The company’s cost of capital is 8%, which is an appropriate
discount rate.
Required:
Compute the net present value of each project. Use a clear
presentation of...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Convert the following numbers as indicated. Use as few digits in the results as necessary or...
- Java program to implement the merge sort your own and test it to sort a list...
- CODE IN C++ PLEASE Write a program to implement the algorithm that you designed in Exercise...
- Show your work please What is the discount yield, bond equivalent yield, and effective annual return...
- Case 7 of the textbook examines the rise of Wal-Mart as a corporate bohemoth. One of...
- The type of listening that involves trying to understand a situation from the speaker’s perspective is...
- Based on the loanable funds theory, explain how each of the following changes should impact interest...
ADVERTISEMENT