Adams Corporation isconsidering four average-risk projects with the following co

Question

Adams Corporation isconsidering four average-risk projects with the following costs andrates 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 estimatesthat it can issue debt at a rate of rd = 10%, and its tax rate is30 percent. It can issue preferred stock that pays a constantdividend of $5 per year at $49 per share. Also, its common stockcurrently sells for $36 per share, the next expected dividend, D1,is $3.50, and the dividend is expected to grow at a constant rateof 6 percent per year. The target capital structure consists of 75percent common stock, 15 percent debt, and 10 percent preferredstock.

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

b)           What is Adams’s WACC?

c)            Which projects should Adams accept?

Explanation / Answer

Adams Corporation isconsidering four average-risk projects with the following co

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