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Excel Online Structured Activity: WACC and optimal capital budget Adamson Corporation is considering four average-risk projects...
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:
| 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 = 11%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $47 per share. Also, its common stock currently sells for $37 per share; the next expected dividend, D1, is $3.75; 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
-
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 %
-
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?
Project 1 _______acceptreject Project 2 _______acceptreject Project 3 _______acceptreject Project 4 _______acceptreject
Solutions
jeff jeffy answered 7 months agoRelated Solutions
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...
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...
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...
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 = 9%, and its tax rate is 25%. It can issue preferred
stock that pays a constant dividend of $4.00 per year at $55.00 per
share. Also, its common stock currently sells for $43.00...
Excel Online Structured Activity: Evaluating risk and return Stock X has a 9.5% expected return, a...
Excel Online Structured Activity: Evaluating risk and return
Stock X has a 9.5% expected return, a beta coefficient of 0.8,
and a 30% standard deviation of expected returns. Stock Y has a
12.0% expected return, a beta coefficient of 1.1, and a 30.0%
standard deviation. The risk-free rate is 6%, and the market risk
premium is 5%. The data has been collected in the Microsoft Excel
Online file below. Open the spreadsheet and perform the required
analysis to answer the...
Excel Online Structured Activity: Constant growth You are considering an investment in Justus Corporation's stock, which...
Excel Online Structured Activity: Constant growth
You are considering an investment in Justus Corporation's stock,
which is expected to pay a dividend of $1.75 a share at the end of
the year (D1 = $1.75) and has a beta of 0.9. The
risk-free rate is 5.3%, and the market risk premium is 4.5%. Justus
currently sells for $46.00 a share, and its dividend is expected to
grow at some constant rate, g. The data has been collected in the
Microsoft...
Excel Online Structured Activity: Constant growth You are considering an investment in Justus Corporation's stock, which...
Excel Online Structured Activity: Constant growth
You are considering an investment in Justus Corporation's stock,
which is expected to pay a dividend of $1.50 a share at the end of
the year (D1 = $1.50) and has a beta of 0.9. The
risk-free rate is 4.9%, and the market risk premium is 4.5%. Justus
currently sells for $39.00 a share, and its dividend is expected to
grow at some constant rate, g. The data has been collected in the
Microsoft...
Excel Online Structured Activity: Nonconstant growth Computech Corporation is expanding rapidly and currently needs to retain...
Excel Online Structured Activity: Nonconstant growth
Computech Corporation is expanding rapidly and currently needs
to retain all of its earnings; hence, it does not pay dividends.
However, investors expect Computech to begin paying dividends,
beginning with a dividend of $1.00 coming 3 years from today. The
dividend should grow rapidly - at a rate of 43% per year - during
Years 4 and 5; but after Year 5, growth should be a constant 9% per
year. The data has been...
OPTIMAL CAPITAL BUDGET Hampton Manufacturing estimates that its WACC is 12.5%. The company is considering the...
OPTIMAL CAPITAL BUDGET
Hampton Manufacturing estimates that its WACC is 12.5%. The
company is considering the following seven investment projects:
Project
Size
IRR
A
$750,000
14.0%
B
1,250,000
13.5
C
1,250,000
13.2
D
1,250,000
13.0
E
750,000
12.7
F
750,000
12.3
G
750,000
12.2
Assume that each of these projects is independent and that each
is just as risky as the firm's existing assets. Which set of
projects should be accepted?
Project A
-Select-AcceptDon't acceptItem 1
Project B
-Select-AcceptDon't acceptItem...
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