WACC Midwest Electric Company (MEC) uses only debt and common equity. It can bor
ID: 2772357 • Letter: W
Question
WACC
Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $3.25, its expected constant growth rate is 3%, and its common stock sells for $27. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 14%, while Project B's return is 11%. 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.
%
Explanation / Answer
Share price =D1÷(r-g)
$27 = $3.25×(1+3%)÷(r-3%)
Cost of common equity, r = 15.4%
WACC = Kd×(1-t)×Wd + Ke×We
= 11%×(1-40%)×0.45+15.4%×0.55
WACC = 11.44%
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