I have attempted this problem and have my Answer at the bottom along with the question but have no Idea what I’m doing or if its right pleases help cause its one problem worth 10points.

Question:
Provide complete answers to the following problem, showing all calculations in good form.

Adams Corporation has four investment opportunities with the following costs and rates of return:

COST RATE OF RETURN
Project 1 $2,000 16.00%
Project 2 $3,000 15.00%
Project 3 $5,000 13.75%
Project 4 $2,000 12.50%

The company estimates that it can issue debt at a before-tax cost of 10 percent, and its tax rate is 30 percent. The company can also issue preferred stock at $49 per share, which pays a constant dividend of $5 per year. The company’s stock currently sells at $36 per share. The year-end dividend, D1, is expected to be $3.50, and the dividend is expected to grow at a constant rate of 6 percent per year.

The company’s capital structure consists of 75 percent common stock, 15 percent debt, and 10 percent preferred stock.

What is the cost of each of the capital components (debt, preferred equity, and common equity)?

What is the WACC?

Which investments should the firm select if the projects are all of average risk?


Answer I came up with:

Preferred Stock: K= 5/49 times 0 growth = 10% [ (Dividend/price) + growth ]



Debt: K= (YTM) * (1-T) = 10% times 1-.3 = 10% times .7 = 7%



Common stock = K = 3.5/36 + 6% = 10% + 6% = 16% [(dividend/price) + growth]



Cap structure Cost of cap weighted ave



Debt 15% 7% 1.05



Common stock 75% 16% 12.00



Preferred stock 10% 10% ___1.00___



14.05% = WACC



Which investments? Project 1 & 2 are greater than 14.05%