Longstreet Communications Inc. (LCI) has the following capital structure, which it WACC

considers to be optimal: debt = 25% (LCI has only long-term debt), preferred stock = 15%, and

common stock = 60%. LCIs tax rate is 40%, and investors expect earnings and dividends to

grow at a constant rate of 6% in the future. LCI paid a dividend of $3.70 per share last year

(D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%,

the market risk premium is 5%, and LCIs beta is 1.3. The following terms would apply to new

security offerings. Preferred: New preferred stock could be sold to the public at a price of $100

per share, with a dividend of $9. Flotation costs of $5 per share would be incurred. Debt: Debt

could be sold at an interest rate of 9%. Common: New common equity will be raised only by

retaining earnings.

a. Find the component costs of debt, preferred stock, and common stock. For

common stock show using both DCF (DDM) and CAPM.

b. What is the WACC?