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LBC Inc. manufactures industrial - type drill presses and received a very large order from a few Asian countries. In order to be able to

LBC Inc. manufactures industrial-type drill presses and received a very large order from a few
Asian countries. In order to be able to supply these countries with its products, LBC Inc. will have to expand its facilities. Of the required expansion, LBC Inc. feels it can raise $75 million internally through retained earnings. The firm's optimum capital structure has been 35% debt, 10% preferred stock, and 55% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently, LBC Inc.'s common stock is traded at a price of $28 per share. Last year's dividend was $1.50 per share. The growth rate is 8%. The company's preferred stock is selling at $45 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. LBC Inc. has bonds outstanding at 6%, but its investment banker has informed the company that interest rates for bonds of equal risk are currently yielding 5%. LBC Inc.s tax rate is 40%.
a) Compute the cost of Kd, Kp, Ke, Kn.
b) Calculate the initial weighted average cost of capital using Ke.
c) How large of a capital budget can the firm support with "retained earnings" financing only?

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