The market for breakfast cereals is dominated by a few large corporations. Each corporation produces a high volume of breakfast
1 answer:
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Answer:
a)
Cost of debt (after tax) = 5.4%
Cost of preferred stock () = 10.53%
Cost of common stock () = 16.18%
b)
WACC = 14%
c)
project 1 and project 2
Explanation:
Given that:
Debt rate () = 9% = 0.09
Tax rate (T) = 40% = 0.4
Dividend per share () = $6
Price per share () = $57
Common stock price ()= $39
Expected dividend () = $4.75
Growth rate (g) = 4% = 0.04
The target capital structure consists of 75% common stock (), 15% debt (
), and 10% preferred stock (
)
a)
Cost of debt (after tax) =`
Cost of debt (after tax) = 5.4%
Cost of preferred stock () =
= 10.53%
= 10.53%
Cost of common stock () =
= 16.18%
b)
WACC = 14%
c) Only projects with expected returns that exceed WACC will be accepted. Therefore only project 1 and project 2 would be accepted