Adamson Corporation is considering four
average-risk projects with the following costs and
The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It
can issue
Also, its common stock currently sells for $38.00 per share; the next expected dividend, D1,
is $4.25, and the dividend is expected to grow at a constant rate of 5% per year. The target
capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.
a. What is the cost of each of the capital components?
b. What is Adamson’s WACC?
c. Only projects with expected returns that exceed WACC will be accepted. Which
projects should Adamson accept?
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