Problem 1012 WACC Midwest Electric Company MEC uses only deb

Problem 10-12 WACC Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate or rd = 10% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. I s last dividend D0 was $2.15 its expected constant growth rate is 5 and its common stock se s for S20. MEC\'s tax rate s 40% Two pro e sare available Pore A has a rate of return oft %, while Project B\'s return is 9%. These two projects are equally risky and about as risky as the firm\'s existing assets a. What is its cost of common equity? Round your answer to two decimal places. b. What is the WACC? Round your answer to two decimal places. c. Which projects should Midwest accept? -Select- Project A Project B

Solution

a. cost of common equity = 2.15*1.05/20 + 5% = 16.29%

b. WACC = 0.30*10%*0.6 + 0.7*16.29% = 13.20%

c. Project A since it returns more than the WACC