Glencor is evaluating four average-risk projects with the following costs and rates of return: Project Cost...

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Finance

Glencor is evaluating four average-risk projects with thefollowing costs and rates of return: Project Cost (R) Expected Rateof 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 thatpays a constant dividend of R5.00 per year at R49.00 per share.Also, its common shares currently sell for R36.00 per share; thenext expected dividend, D1, is R3.50; and the dividend is expectedto grow at a constant rate of 6% per year. The target capitalstructure 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 beaccepted. Which projects should Adams accept? (3)

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4.5 Ratings (692 Votes)

61DebtTax rate 30After tax cost of debt kd1t 10130 7Preferred sharesCost of preferred shares kp DividendMarket priceof preferred shares 549 See Answer

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Glencor is evaluating four average-risk projects with thefollowing costs and rates of return: Project Cost (R) Expected Rateof ReturnProject Cost (R)Expected Rate of Return1200016%2300015%3013,75%4200012,50%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 thatpays a constant dividend of R5.00 per year at R49.00 per share.Also, its common shares currently sell for R36.00 per share; thenext expected dividend, D1, is R3.50; and the dividend is expectedto grow at a constant rate of 6% per year. The target capitalstructure 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 beaccepted. Which projects should Adams accept? (3)

Project	Cost (R)	Expected Rate of Return
1	2000	16%
2	3000	15%
3	0	13,75%
4	2000	12,50%