Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt =
Question:
Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. LCI's tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 6% in the future. LCI paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Treasury bonds yield 6%, the market risk premium is 5%, and LCI's beta is 1.3. These terms would apply to new security offerings:
Preferred: New preferred could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs of $5 per share would be incurred.
Debt: Debt could be sold at an interest rate of 9%.
a. Find the component costs of debt, preferred stock, and common stock. Assume LCI does not have to issue any additional shares of common stock.
b. What is the WACC?
Step by Step Answer:
Financial Management Theory & Practice
ISBN: 9780324652178
12th Edition
Authors: Eugene BrighamMichael Ehrhardt