WACC Lancaster Engineering Inc (LEI) has the following capital structure, which it considers to be optimal Debt 25 Preferred stock 15 Common equity 60 100 LEIs expected net income this year is $34,285 72, its established dividend payout ratio is 30 percent, its federal plus state tax rate is 40 percent, and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future LEI paid a dividend of $3 60 per share last year, and its stock currently sells for $54 per share LEI can obtain new capital in the following ways Preferred New preferred stock with a dividend of $11 can be sold to the public at a price of $95 per share Debt Debt can be sold at an interest rate of 12 percent Required Determine the cost of each capital component (6 marks) Calculate the WACC (4 marks) The Heuser Companys currently outstanding bonds have a 10 percent coupon and a 12 percent yield to maturity Heuser believes it could issue new bonds at par that would provide a similar yield to maturity If its marginal tax rate is 35 percent, what is Heusers after tax cost of debt (3 marks) Tunney Industries can issue perpetual preferred stock at a price of $47 50 a share The stock would pay a constant annual dividend of $3 80 a share What is the companys cost of preferred stock, rp (2 marks) Percy Motors has a target capital structure of 40 percent debt and 60 percent common equity, with no preferred stock The yield to maturity on the companys outstanding bonds is 9 percent, and its tax rate is 40 percent Percys CFO estimates that the companys WACC is 9 96 percent What is Percys cost of common equity (5 marks) Javits Sons common stock currently trades at $30 a share It is expected to pay an annual dividend of $3 00 a share at the end of the year, and the constant growth rate is 5 percent a year What is the companys cost of common equity (2 marks) If the company were to issue new stock, it would incur a 10 percent flotation cost What would the cost of equity from new stock be (3 marks)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 17, 2024

WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15 Common equity 60 100%

WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:

Debt 25%

Preferred stock 15

Common equity 60

100%

LEIs expected net income this year is $34,285.72, its established dividend payout ratio is 30 percent, its federal-plus-state tax rate is 40 percent, and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. LEI paid a dividend of $3.60 per share last year, and its stock currently sells for $54 per share. LEI can obtain new capital in the following ways:

Preferred: New preferred stock with a dividend of $11 can be sold to the public at a price of $95 per share.
Debt: Debt can be sold at an interest rate of 12 percent.

Required

Determine the cost of each capital component. (6 marks)
Calculate the WACC (4 marks)

The Heuser Companys currently outstanding bonds have a 10 percent coupon and a 12 percent yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35 percent, what is Heusers after-tax cost of debt? (3 marks)

Tunney Industries can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. What is the companys cost of preferred stock, rp? (2 marks)

Percy Motors has a target capital structure of 40 percent debt and 60 percent common equity, with no preferred stock. The yield to maturity on the companys outstanding bonds is 9 percent, and its tax rate is 40 percent. Percys CFO estimates that the companys WACC is 9.96 percent. What is Percys cost of common equity? (5 marks)

Javits & Sons common stock currently trades at $30 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year, and the constant growth rate is 5 percent a year.

What is the companys cost of common equity? (2 marks)
If the company were to issue new stock, it would incur a 10 percent flotation cost. What would the cost of equity from new stock be? (3 marks)