Back to Assignment Attempts: Keep the Highest: /3 7. Problem 10.12 WACC Empire E

Question

Back to Assignment Attempts: Keep the Highest: /3 7. Problem 10.12 WACC Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd-10% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend (Do) was $2.30, its expected constant growth rate is 3%, and its common stock sells for $20. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 12%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations. calculations. c. Which projects should Empin Select v Grade It Now Save & Continue

Explanation / Answer

cost of equity = 2.30*1.03/20 + 3% = 14.85%

WACC = 11.75%

Accept project A

Amount weight cost weight*cost equity 65 0.6500 14.85% 0.0965 debt 35 0.3500 6.00% 0.0210

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