Commonwealth Electric Company (CEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd + 10 % as long as its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0
Was $2, its expected constant growth rate is 4%, and the common stock sells for $20. CEC tax rate is 40%. Two projects are available, Project A has a rate of return of 13%, while Project has a rate of return of 10%. These two projects are equally risky and about as risky as the firm’s existing assets.