Commonwealth Electric Company (CEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd + 10 % as long as its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0 Was $2, its expected constant growth rate is 4%, and the common stock sells for $20. CEC tax rate is 40%. Two projects are available, Project A has a rate of return of 13%, while Project has a rate of return of 10%. These two projects are equally risky and about as risky as the firm's existing assets.
a. What is the cost of common equity?
b. What is the WACC?
c. Which project should Commonwealth accept?