Adams Corporation is considering four average-risk projects with the following costs and rates of return: The company

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Adams Corporation is considering four average-risk projects with the following costs and rates of return:

Expected Rate of Return 16.00% 15.00 13.75 12.50 Project Cost $2,000 3,000 2 3 5,000 2,000 4

The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $49.00 per share. Also, its common stock currently sells for $36.00 per share; the next expected dividend, D1, is $3.50; 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.

a. What is the cost of each of the capital components?

b. What is Adams’ WACC?

c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Fundamentals of Financial Management

ISBN: 978-0324664553

Concise 6th Edition

Authors: Eugene F. Brigham, Joel F. Houston

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