Evaluating Average-Risk Projects Assignment
Glencor is evaluating four average-risk projects with the following costs and rates of return: Project Cost (R) Expected Rate of Return
| Project | Cost (R) | Expected Rate of Return |
| 1 | 2000 | 16% |
| 2 | 3000 | 15% |
| 3 | 0 | 13,75% |
| 4 | 2000 | 12,50% |
The company estimates that it can issue debt at a rate of rd =10%, and its tax rate is 30%. It can issue preferred shares that pays a constant dividend of R5.00 per year at R49.00 per share. Also, its common shares currently sell for R36.00 per share; the next expected dividend, D1, is R3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common shares, 15% debt, and 10% preferred shares.
Required:
6.1 What is the cost of each of the capital components? (3)
6.2 What is Adams’s WACC? (4)
6.3 Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept? (3) Get Finance homework help today
