Midwest Electric Company (MEC) uses only debt and common equity. It can borrow u

Question

Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. Its last dividend (D0) was $1.80, its expected constant growth rate is 3%, and its common stock sells for $21. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 15%, while Project B's return is 10%. These two projects are equally risky and about as risky as the firm's existing assets.

What is the WACC? Round your answer to two decimal places

Explanation / Answer

cost of common equity

price = D1/Re- g

$21 =$1.80*1.03/(re-3%)

re= 11.83%
cost of common equity = 11.83%

WACC = 11.83%*70% + 11%*(1-40%)*30%
=10.26%

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