5.Levine Ross Inc. (LRI) has the following targeted capital structure: debt=25%, preferred stock=15% and common stock=60%. LRIs tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. LRI paid a dividend of $3.70 per share last year (Do), and its stock currently sells at a price of $60 per share. Ten-year government bonds yield 5%, the return of FBM KLCI is 12% and LRIs beta is 1.25. The following terms would apply for new security offerings.

New preferred could be sold to the public at a price of $100 per share, with a dividend of $9. Floatation costs of $5 per share would be incurred. Debt could be sold at an interest rate of 9%. New common equity will be raised only by retaining earnings.

Whats the cost of debt?

1. 5.40%
2. 3.60%
3. 9.00%

6.Whats the cost of preferred stock?(3 Points)

1. 9.00%
2. 9.47%
3. 8.78%

7.Whats the cost of retained earnings using the CAPM method?

1. 13.75%
2. 11.25%
3. 7.50%

8.Whats the WACC?

1. 9.73%
2. 11.02%
3. 10.48%