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 firms;s existing assests. a. What is its cost of common equity? b.What is the WACC? c. Which project should Midwest accept?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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
a. What is its
b.What is the WACC?
c. Which project should Midwest accept?
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