Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:

Debt 10%

Preferred stock 10%

Common equity 80%/100%

LEIs overall applicable income tax rate is 30%. Its stock beta is 1.2. The risk-free rate of return on 3-month treasury securities has been reported to be 6% and the return on the stock markets composite index has been 11%.

Preferred: New preferred stock with a dividend of $11 can be sold to the public for $110 per share. Debt: Debt can be sold at an interest rate of 10 percent. Required

A). Compute the cost of each capital structure component. [12 marks]

B) Compute the weighted average cost of capital. [6 marks]