Answers
a). Cost of common equity = [{D0 * (1 + g)} / P0] + g
= [{$2.35 * (1 + 0.06)} / $29] + 0.06 = 0.0859 + 0.06 = 0.1459, or 14.59%
b). WACC = [wD * kD * (1 - t)] + [wE * kE]
= [0.35 * 11% * (1 - 0.25)] + [0.65 * 14.59%]
= 2.89% + 9.48% = 12.37%
c). Project A should be accepted as its rate of return is greater than the company's WACC.
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