WACC Empire Electric Company (EEC) uses only debt and common equity.
It can borrow unlimited amounts at an interest rate of r_d = 9% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity.
Its last dividend (D_0) was $1.90, its expected constant growth rate is 5%, and its common stock sells for $24. EEC's tax rate is 40%.
Two projects are available: Project A has a rate of return of 11%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets.
a. What is its cost of common equity? Do not round your intermediate calculations.
b. What is the WACC? Do not round your intermediate calculations.
c. Which projects should Empire accept?