Problem 10-12 WACC Midwest Electric Company (MEC) uses only debt and common equi

Question

Problem 10-12
WACC

Midwest Electric Company (MEC) 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 35% debt and 65% common equity. Its last dividend (D0) was $2.55, its expected constant growth rate is 5%, and its common stock sells for $29. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 12%, while 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? Round your answer to two decimal places.
%

What is the WACC? Round your answer to two decimal places.
%

Which projects should Midwest accept?
-Select-Project AProject B

Explanation / Answer

rd = 9%, rd(1

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