Lancaster Engineering Inc. (LEI) has the following capital structure, which it considersto be optimal:Debt 25%Preferred stock 15Common equity 60 ===== 100%LEI’s expected net income this year is $34,285.72, its established dividend payout ratio is30%, its federal-plus-state tax rate is 40%, and investors expect future earnings and dividendsto grow at a constant rate of 9%. LEI paid a dividend of $3.60 per share last year, andits stock currently sells for $54.00 per share. LEI can obtain new capital in the followingways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a priceof $95.00 per share. (2) Debt can be sold at an interest rate of 12%.a. Determine the cost of each capital component.b. Calculate the WACC.c. LEI has the following investment opportunities that are average-risk projects:Project Cost at t = 0 Rate of ReturnA $10,000 17.4%B 20,000 16.0C 10,000 14.2D 20,000 13.2E 10,000 12.0Which projects should LEI accept? Why? Assume that LEI does not want to issue any newcommon stock.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers
to be optimal:
Debt 25%
Common equity 60
=====
100%
LEI’s expected net income this year is $34,285.72, its established dividend payout ratio is
30%, its federal-plus-state tax rate is 40%, and investors expect future earnings and dividends
to grow at a constant rate of 9%. LEI paid a dividend of $3.60 per share last year, and
its stock currently sells for $54.00 per share. LEI can obtain new capital in the following
ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price
of $95.00 per share. (2) Debt can be sold at an interest rate of 12%.
a. Determine the cost of each capital component.
b. Calculate the WACC.
c. LEI has the following investment opportunities that are average-risk projects:
Project Cost at t = 0 Rate of Return
A $10,000 17.4%
B 20,000 16.0
C 10,000 14.2
D 20,000 13.2
E 10,000 12.0
Which projects should LEI accept? Why? Assume that LEI does not want to issue any new
common stock.
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