P10.5 Project Selection Midwest Water Works estimates that its WACC is 10.5%. Th
ID: 2661816 • Letter: P
Question
P10.5 Project Selection Midwest Water Works estimates that its WACC is 10.5%. Thecompany is considering the following capital budgetingprojects: Project Size Rate of return A 1 million 12% B 2 million 11.5% C 2 million 11.2 D 2 million 11.0 E 1 million 10.7 F 1 million 10.3 G 1 million 10.2 Assume that each of these projects is just as risky as thefirms existing assests, and the firm may accept all the projects oronly some of them. Which set of projects should be accepted?Explain. P10.2 Cost of preferred stock Tunney Industries can issue perpetual preferred stock at aprice of $47.50 a share. The stock would pay a cosntant annuladividend of $3.80 a share. What is the comapnys cost of preferredstock? P10.5 Project Selection Midwest Water Works estimates that its WACC is 10.5%. Thecompany is considering the following capital budgetingprojects: Project Size Rate of return A 1 million 12% B 2 million 11.5% C 2 million 11.2 D 2 million 11.0 E 1 million 10.7 F 1 million 10.3 G 1 million 10.2 Assume that each of these projects is just as risky as thefirms existing assests, and the firm may accept all the projects oronly some of them. Which set of projects should be accepted?Explain. P10.2 Cost of preferred stock Tunney Industries can issue perpetual preferred stock at aprice of $47.50 a share. The stock would pay a cosntant annuladividend of $3.80 a share. What is the comapnys cost of preferredstock? Project Size Rate of return A 1 million 12% B 2 million 11.5% C 2 million 11.2 D 2 million 11.0 E 1 million 10.7 F 1 million 10.3 G 1 million 10.2Explanation / Answer
Constant Annual Dividend Amount (D) = $3.80 per share
Required rater of return (R ) = ?
Required rate of return (R) = D / P0
= $3.80 / $47.50
Required rate of return (R ) = 0.08 (or)8%
Project Size Rate of Return WACC A $1,000,000 12.00% 10.50% B $2,000,000 11.50% 10.50% C $2,000,000 11.20% 10.50% D $2,000,000 11.00% 10.50% E $1,000,000 10.70% 10.50% F $1,000,000 10.30% 10.50% G $1,000,000 10.20% 10.50% The Project whose return is more than that of the WeightedAverage Cost of Capital should be accepted. Out of Projects A, B, C, D & E, Project A should beaccepted as the return is more at lower cost.Related Questions
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