WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15 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: l Preferred: New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. l Debt: 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 13.7 E 10,000 12.0 Which projects should LEI accept? Why?
WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it
considers to be optimal:
Debt 25%
Preferred stock 15
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:
l Preferred: New preferred stock with a dividend of $11.00 can be sold to the public at a
price of $95.00 per share.
l Debt: 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 13.7
E 10,000 12.0
Which projects should LEI accept? Why?
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