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In: Finance
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 stock currently sells for $40 per share; the next expected dividend, D1, is $4.25; 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.
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? |
Solutions
jeff jeffy answered 1 year 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...
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...
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...
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...
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...
A firm estimates that its average-risk projects have a WACC of 10%, its below-average risk projects...
A firm estimates that its average-risk projects have a WACC of
10%, its below-average risk projects have a WACC of 9%, and its
above-average risk projects have a WACC of 12%. Which of the
following projects (A, B, and C) should the company accept?
A:Project B is of below-average risk and has a return of
9.5%.
B:Project C is of above-average risk and has a return of
11.5%.
C:Project A is of average risk and has a return of 9%....
Your division is considering two projects. Its WACC is 10% (weighted average cost of capital, that...
Your division is considering two projects. Its WACC is 10%
(weighted average cost of capital, that represent a firm’s cost of
capital in which each category of capital is proportionately
weighted), the projects’ after-tax cash flows (in millions of
dollars) would be as follows:
Project A
0 = - $30
1 = - $ 5
2 = $ 10
3 = $ 15
4 = 20
Project B
0 = - $ 30
1 = $ 20
2 = $10...
(A) Please calculate the Weighted Average Cost of Capital (WACC) for the following company. Assumptions: Risk...
(A) Please calculate the Weighted Average Cost of Capital (WACC)
for the following company. Assumptions: Risk free rate = 4.0%;
Company’s spread = 2.0%; Expected return of the market = 9.0%;
Company Beta = 1.10; Company debt to capitalization ratio = 40%;
and Company tax rate = 30%. (Please be sure to show your
calculations.)
(B) Please define and explain the Hurdle Rate. (3 points)
eBook A firm with a 13% WACC is evaluating two projects for this year's capital budget....
eBook
A firm with a 13% WACC is evaluating two projects for this
year's capital budget. After-tax cash flows, including
depreciation, are as follows:
0
1
2
3
4
5
Project M
-$3,000
$1,000
$1,000
$1,000
$1,000
$1,000
Project N
-$9,000
$2,800
$2,800
$2,800
$2,800
$2,800
Calculate NPV for each project. Do not round intermediate
calculations. Round your answers to the nearest cent.
Project M: $
Project N: $
Calculate IRR for each project. Do not round intermediate
calculations. Round your answers...
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