Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15% Common equity 60% Total 100% LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent. LEI can obtain new capital in the following ways: New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share. Debt can be sold at an interest rate of 12 percent. Determine the cost of each capital component. Calculate the WACC. LEI has the following investment opportunities that are average-risk projects for the firm: Project Cost at t = 0 Rate of Return A $10,000 16.4% B 20,000 15.0% C 10,000 13.2% D 20,000 12.0% E 10,000 11.5% Which projects should LEI accept? Why?
Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15% Common equity 60% Total 100% LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent. LEI can obtain new capital in the following ways: New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share. Debt can be sold at an interest rate of 12 percent. Determine the cost of each capital component. Calculate the WACC. LEI has the following investment opportunities that are average-risk projects for the firm: Project Cost at t = 0 Rate of Return A $10,000 16.4% B 20,000 15.0% C 10,000 13.2% D 20,000 12.0% E 10,000 11.5% Which projects should LEI accept? Why?
Chapter9: The Cost Of Capital
Section: Chapter Questions
Problem 1STP
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Question
Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:
|
Debt |
25% |
|
|
15% |
|
Common equity |
60% |
|
Total |
100% |
LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent.
LEI can obtain new capital in the following ways:
- New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share.
- Debt can be sold at an interest rate of 12 percent.
- Determine the cost of each capital component.
- Calculate the WACC.
- LEI has the following investment opportunities that are average-risk projects for the firm:
|
Project |
Cost at t = 0 |
|
|
A |
$10,000 |
16.4% |
|
B |
20,000 |
15.0% |
|
C |
10,000 |
13.2% |
|
D |
20,000 |
12.0% |
|
E |
10,000 |
11.5% |
Which projects should LEI accept? Why?
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