• Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%.

LCIs tax rate is 40 percent and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. LCI paid a dividend of $3.60 per share last year (D₀), and its stock currently sells at a price of $60 per share. Treasury bonds yield 11 percent; an average stock has a 14 percent expected rate of return; and LCIs beta is 1.51.

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 $11. Flotation costs of $5 per share would be incurred.

Debt: Debt could be sold at an interest rate of 12 percent.