1. Kramerica Industries has a capital structure consisting of 65% debt and 35% common stock....
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1. Kramerica Industries has a capital structure consisting of 65% debt and 35% common stock. The companys CFO has obtained the following information: o The before-tax YTM on the company's bonds is 8.5%. o Kramerica will pay a $3.00 dividend on its common stock and the dividend is expected to grow at a constant rate of 6% a year. The common stock currently sells for $50 a share. o Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget. o The company's tax rate is 35%.
a. What is Kramericas WACC?
b. Two independent projects are available for Kramerica to invest in: Project A has an IRR of 10%, while Project Bs has an IRR of 12.5%. These two projects are equally risky and are of average risk. Which project(s) should Kramerica accept?
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