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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 35% debt and 65% common equity. Its last dividend (D 0 ) was $2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 12%. and Project B’s return is 11%. 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 Empire accept?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter 10, Problem 12P
Textbook Problem

WACC Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 35% debt and 65% common equity. Its last dividend  (D0) was $2.20, its expected constant growth rate is 6%, and its common stock sells for $26. EEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 12%. and Project B’s return is 11%. These two projects are equally risky and about as risky as the firm’s existing assets.

  1. a. What is its cost of common equity?
  2. b. What is the WACC?
  3. c. Which projects should Empire accept?

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Chapter 10 Solutions

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