Karachi Electric Supply Company (KESC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 11 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was Rs 12, its expected constant growth rate is 4 percent, and its stock sells at a price of Rs. 50. KESC’s tax rate is 40 percent. Two projects are available: Project A has a rate of return of 13 percent, while Project B has a rate of return of 10 percent. All of the company’s potential projects are equally risky and as risky as the firm’s other assets. What is KESC’s cost of common equity? What is KESC’s WACC? c. Which projects should KESC’s select? and why?
Karachi Electric Supply Company (KESC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 11 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was Rs 12, its expected constant growth rate is 4 percent, and its stock sells at a price of Rs. 50. KESC’s tax rate is 40 percent. Two projects are available: Project A has a rate of return of 13 percent, while Project B has a rate of return of 10 percent. All of the company’s potential projects are equally risky and as risky as the firm’s other assets. What is KESC’s cost of common equity? What is KESC’s WACC? c. Which projects should KESC’s select? and why?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 3P
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Karachi Electric Supply Company (KESC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 11 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was Rs 12, its expected constant growth rate is 4 percent, and its stock sells at a price of Rs. 50. KESC’s tax rate is 40 percent. Two projects are available: Project A has a
- What is KESC’s
cost of common equity ? - What is KESC’s WACC?
c. Which projects should KESC’s select? and why?
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