WACC Midwest Electric Company (MKC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of r d = 10% 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 $2, 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 13%, while Project B’s return is 10%. 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?
Fundamentals of Financial Manageme...
Fundamentals of Financial Manageme...
Solutions
WACC Midwest Electric Company (MKC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at 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 its common stock sells for $20. MEC’s tax rate is 40%. Two projects are available: Project A has a rate of return of 13%, while Project B’s return is 10%. 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?
Expert Solution
Want to see the full answer?
Check out a sample textbook solution.Chapter 10 Solutions
Additional Business Textbook Solutions
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Accounting Information Systems
Fundamentals of Financial Management (MindTap Course List)
Financial & Managerial Accounting
College Accounting, Chapters 1-27
Contemporary Marketing
Accounting Information Systems
Managerial Accounting: The Cornerstone of Business Decision-Making
STATISTICS F/BUSINESS+ECONOMICS-TEXT
Management, Loose-Leaf Version
Exploring Economics
Financial And Managerial Accounting
Brief Principles of Macroeconomics (MindTap Course List)
Financial Accounting
Accounting (Text Only)
MKTG 12:STUDENT ED.-TEXT
Financial Accounting
Principles of Macroeconomics (MindTap Course List)
Foundations of Business (MindTap Course List)
Principles of Microeconomics (MindTap Course List)
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Principles of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
Essentials of Business Communication (MindTap Course List)
Statistics for Business & Economics, Revised (MindTap Course List)
Corporate Financial Accounting
Financial & Managerial Accounting
College Accounting (Book Only): A Career Approach
Intermediate Accounting: Reporting And Analysis
Pkg Acc Infor Systems MS VISIO CD
Fundamentals of Financial Management (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
College Accounting (Book Only): A Career Approach
Practical Management Science
Purchasing and Supply Chain Management
Economics (MindTap Course List)
Survey of Accounting (Accounting I)
Cornerstones of Cost Management (Cornerstones Series)
Microeconomics
PAYROLL ACCT.,2019 ED.(LL)-TEXT
Economics For Today
Corporate Financial Accounting
Macroeconomics
Economics: Private and Public Choice (MindTap Course List)
Managerial Accounting
MACROECONOMICS FOR TODAY
Micro Economics For Today
Microeconomics: Private and Public Choice (MindTap Course List)
Understanding Management (MindTap Course List)
Macroeconomics: Private and Public Choice (MindTap Course List)
Cornerstones of Financial Accounting
