Faster Engineering Inc. (FEI) has the following capital structure, which it considers to be optimal: Debt 20% Preferred Stock 15% Common Equity 65% Total 100% FEI’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federalplus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of 7%. LEI paid a dividend of $4.20 per share last year, and its stock currently sells for $54.00 per share. FEI can obtain new capital in the following ways: (1)New preferred stock with a dividend of $12.00 can be sold to the public at a price of $90.00 per share. (2)Debt can be sold at an interest rate of 11%. a. Determine the cost of each capital component. b. Calculate the WACC.
Faster Engineering Inc. (FEI) has the following capital structure, which it considers to be optimal:
Debt 20%
Common Equity 65%
Total 100%
FEI’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federalplus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of
7%. LEI paid a dividend of $4.20 per share last year, and its stock currently sells for $54.00 per share. FEI can obtain new capital in the following ways:
(1)New preferred stock with a dividend of $12.00 can be sold to the public at a price of $90.00 per share.
(2)Debt can be sold at an interest rate of 11%.
a. Determine the cost of each capital component.
b. Calculate the WACC.
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