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 $100 per share.Debt can be issued at a coupon rate of 15%.Determine the cost of each capital component.Calculate the Weighted Average Cost of Capital (WACC).LEI has the following investment opportunities that are average-risk projects for the firm:ProjectCostInternal Rate of ReturnA$20,00013%B17,00012.5%C15,00012%D14,00011.5%E12,00011%Which projects should LEI accept? Why?

Solution- Cost of equity=4/50+6% =14% Cost of preferred stock=10/100…

Answered: Which projects should LEI accept? Why?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 $100 per share.
Debt can be issued at a coupon rate of 15%.

Determine the cost of each capital component.
Calculate the Weighted Average Cost of Capital (WACC).
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?

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