WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r_d = 11% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity.
Its last dividend (D_0) was $1.65, its expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40%.
Two projects are available: Project A has a rate of return of 10%, while Project B's return is 12%. These two projects are equally risky and about as risky as the firm's existing assets.
a. What is its cost of common equity? %
b. What is the WACC? %
c. Which projects should Midwest accept?