Problem:
Adams Corp. is considering four average-risk projects with the following costs & rates of returns:
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%
Adams has a cost of debt = 10%, tax rate is 30%. Adams can issue preferred stock that pays a constant dividend of $5 per year at $49 per share. Adams common stock sells for $36 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 is 75% common stock, 15% debt, and 10% preferred stock.
1) What is the cost of each of the capital components?
2) What is Adams WACC?
3) Which project should Adams accept?