Please, use these formulas that are in the image only. LEI Corporation has the following capital structure: Debt 35%, Preferred stock 15%, and Commonequity 50%.LEI is expected to pay a dividend of $4 per share next year, its stock currently sells for $50 pershare, and investors expect dividends to grow at a constant rate of 6% in the future. LEI's tax rateis 40%.LEI can obtain new capital in the following ways:• Preferred stock with a dividend of $10 can be sold to the public at a price of S100 per share.Debt can be issued at a coupon rate of 15%.a. Determine the cost of each capital component.b. Calculate the Weighted Average Cost of Capital (WACC).c. LEI has the following investment opportunities that are average-risk projects for the firm:ProjectCostInternal Rate of ReturnA$20,00013%B17,00012.5%15,00012%D14,00011.5%E12,00011%Which projects should LEI accept? Why? 1-dividend growth model:Rg =+ gD = expected dividend paymentP, = current priceg = constant divident growth rateRg = cost of equity2-CAPM equation:Rg = Rp + Be(E(R) – Rp)Rg: The cost of equityR: risk-free rate: the yield on newly issued Treasury bonds.B: beta coefficientE(R ): the expected market return.E(R ) -R: the expected market risk premium.3-Approximating the costPV – Nara =N+ PV2I-annual interest in dollars.PV=Par Value.Na = net proceeds from the sale of debt (bond).n = number of years to the bond's maturity.4-The after-tax cost of debtThe after-tax cost of debt, ri, can be found by multiplying the before-taxcost, ra by 1 minus the tax rate, T, as stated in the following equation:r = ra x (1 - T)5-the cost of preferred stockP =D/RR=D/PWeighted Average Cost of Capital- WACCNotationE= market value of equity = # of outstanding shares timesprice per shareD- market value of debt = # of outstanding bonds times bondpriceP = market value of Preferred stock = # of outstandingpreferred shares times price per preferred shareV = market value of the firm- D+E+PWeightsw =E/V = percent financed with equityEw = D/V = percent financed with debtDW = P/V = percent financed with preferred stockPWACC = w_ ×R_ +w_ xr ++wD

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LEI Corporation has the following capital structure: Debt 35%, Preferred stock 15%, and Common equity 50%. LEI is expected to pay a dividend of $4 per share next year, its stock currently sells for $50 per share, and investors expect dividends to grow at a constant rate of 6% in the future. LEI's tax rate is 40%. LEI can obtain new capital in the following ways: Preferred stock with a dividend of $10 can be sold to the public at a price of S100 per share. Debt can be issued at a coupon rate of 15%. a. Determine the cost of each capital component. b. Calculate the Weighted Average Cost of Capital (WACC). c. LEI has the following investment opportunities that are average-risk projects for the firm: Project Cost Internal Rate of Return A $20,000 13% B 17,000 12.5% C 15,000 12% D 14,000 11.5% E 12,000 11% Which projects should LEI accept? Why?

LEI Corporation has the following capital structure: Debt 35%, Preferred stock 15%, and Common equity 50%. LEI is expected to pay a dividend of $4 per share next year, its stock currently sells for $50 per share, and investors expect dividends to grow at a constant rate of 6% in the future. LEI's tax rate is 40%. LEI can obtain new capital in the following ways: Preferred stock with a dividend of $10 can be sold to the public at a price of S100 per share. Debt can be issued at a coupon rate of 15%. a. Determine the cost of each capital component. b. Calculate the Weighted Average Cost of Capital (WACC). c. LEI has the following investment opportunities that are average-risk projects for the firm: Project Cost Internal Rate of Return A $20,000 13% B 17,000 12.5% C 15,000 12% D 14,000 11.5% E 12,000 11% Which projects should LEI accept? Why?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

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