Question
Longstreet Communications Inc. (LCI) has thefollowingcapitalstructure, which it considersto be optimal: debt = 25%, preferredstock = 15%, andcommonstock = 60%. LCIstax rate is 40%, andinvestorsexpectearningsanddividendstogrow
Longstreet Communications Inc. (LCI) has thefollowingcapitalstructure, which it considersto be optimal: debt = 25%, preferredstock = 15%, andcommonstock = 60%. LCIstax rate is 40%, andinvestorsexpectearningsanddividendstogrow at a constant rate of 6% in thefuture. Ten-yearTreasurybondsyield 6%, the market risk premium is 5%, andLCIs beta is 1.3. Thefollowingtermswouldapplytonewsecurityofferings.
Preferred: New preferredcould be soldtothepublic at a price of $100 pershare, witha dividend of $9.
Debt: Debtcould be sold at an interest rate of 9%.
Common: New commonequitywill be raisedonlybyretainingearnings.
a. Findthecomponentcosts of debt, preferredstock, andcommonstock.
b. What is the WACC?
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