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problem: Midwest Electric Company [MEC] uses only debt and common equity. It can use unlimited amounts at an interest rate of Rd=10% as long as it finances at its target capital structure, which calls for 45 percent debt & 55 percent common equity. Its last dividend was $2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40 percent. Two projects are available. These two (2) projects are equally risky and also about as risky as firm's existing assets.

[A] Determine its cost of common equity?

[B] Which projects should Midwest accept?

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  • Reference No.:- M921968

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