Question
Levine Ross Inc. (LRI) has the following targeted capital structure: debt=25%, preferred stock=15% and common stock=60%. LRI's tax rate is 40%, and investors expect earnings
Levine Ross Inc. (LRI) has the following targeted capital structure: debt=25%, preferred stock=15% and common stock=60%. LRI's 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 LRI's 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. What's the cost of debt?What's the cost of preferred stock?What's the cost of retained earnings using the CAPM method
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