LEI has the following capital structure, which it considers to be optimal:
Debt = 30%
Preferred stock = 10
Common stock = 60
LEI’s expected net income this year is $36,000, its established dividend payout ratio is 30 percent, its tax rate is 30 percent, and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. LEI paid a dividend of $3.60 per share last year and its stock currently sells at a price of $32 per share.
LEI might obtain new capital by:
Common stock: The new common shares outstanding would have a flotation cost of 10% up to $12,000 and a 20% flotation for more than $12,000.
Preferred stock: the preferred dividend = $9 per share @ price of $100 per share. However, there’s a flotation cost of $5 for new preferred stock up to $8,000, and a flotation cost of $10 for new issuing above $8,000.
Debt: for the interest rate is 13% for debts up to $5,000; 15% for up to $10,000, and 18% for debts above $10,000.
LEI has the following investment choices:
Project Cost N CFs Life
A $15,000 $2500 7
B 12,000 3400 5
C 10,000 3500 8
D 20,000 4000 10
E 20,000 5500 6
What’s your analysis?
Required: 1. Determine the cost of each capital component 2. Determine the weighted average cost of capital (WACC) for LEI.