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: Proiect Cost Internal Rate of Return
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: Proiect Cost Internal Rate of Return
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 15PROB
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Transcribed Image Text: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%.
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?
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