Determine cost of each capital component

Assignment Help Financial Management
Reference no: EM131555349

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

Long Term Debt                   30%

Preferred Stock                    10%

Common Stock                     60%

Total                                       100%

LEI can obtain capital in the following ways:

New Preferred Stock with a dividend of $12 can be sold at $97 to the public; however LEI will incur $2 of flotation costs for each share it sells.

Debt can be sold at a pre-tax cost of 12%.   LEI’s tax rate is 40%. (Note that 12% is the pre-tax cost; all costs must be expressed on an after-tax basis so as to be comparable.)

LEI can sell its common stock for $55. However they expect underwriting fees to be $3 per share and an additional $2 per share in other flotation costs. They expect to pay a dividend on the common stock next year of $3.50 and it is expected that dividends will continue to grow at the historical rate of 8%.

Required:

Determine the cost of each capital component.

Determine the weighted average cost of capital (WACC) for LEI.

Reference no: EM131555349

Questions Cloud

Explain how positive reinforcement could be utilized : Briefly explain how positive reinforcement could be utilized to help Bobby increase physical activity
How did the author back up their claim : The evidence (data, study, link to another study, etc.) the author used to support their claim(s) is provided (How did the author back up their claim)
What are your put options worth-what is your net profit : If, at expiration, the stock is selling for $39 per share, what are your put options worth? What is your net profit?
How can teachers use popular culture in the classroom : What features of popular culture today are impediments to healthy, wholesome play? How can teachers use popular culture in the classroom
Determine cost of each capital component : Determine the cost of each capital component. Determine the weighted average cost of capital (WACC) for LEI.
Determine the therapeutic value of your self-disclosures : What guidelines might you use to determine the therapeutic value of your self-disclosures to clients
Weak dollar will-suppose the current spot rate : Suppose the current spot rate for the SFr is $0.7220. A call option with an exercise price of $0.7650 is said to be. A weak dollar will
Describe how workplace rewards affect productivity : Describe how will goal setting, performance evaluation, and workplace rewards affect productivity and job satisfaction in a company
Recorded set of data has maximum value : Recorded set of data has maximum value 12. However, when the data was entered into the computer, this value was entered by mistake as 120.

Reviews

Write a Review

Financial Management Questions & Answers

  How long will you have to leave the money in the account

Your grandparents put $50,000 into a bank account earning 7.2%. You can’t withdraw the money until the balance has doubled. How long will you have to leave the money in the account (to the nearest whole year)? a. 9 years b. 10 years c. 12 years d. 15..

  What is its cost of equity if the corporate tax rate

A firm has a debt-to-equity ratio of 1.75. If it had no debt, its cost equity would be 9%. Its cost of debt is 7%. What is its cost of equity if the corporate tax rate is 50%?

  Pmpm rate assume that half of the 100000 covered lives in

assume that half of the 100000 covered lives in the commercial payer group will be moved into a capitated plan. what

  Describe the benefits and drawback dollarization

Should emerging economies follow a pegged exchange rate system? What are the pros and cons of a pegged exchange rate system? Can any country be on a pegged exchange rate system? Describe the benefits and drawback dollarization.

  What are bonds worth today if required market rate of return

B Corporation has $1000 par value bonds with 7 years left to maturity, a stated annual coupon rate of 4.5 percent (with annual interest payments). What are these bonds worth today if the required market rate of return is 6 percent? _________ What are..

  Holding portfolio with the investments and betas

Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock Dollar investment Beta A $300,000 1.15 B 100,000 1.5 C 400,000 0.8 D 200,000 -0.35 Total investment 1,000,000 The market's required return is 11% and th..

  Compute the net present value of each piece of equipment

Assuming a discount rate of 12%, compute the net present value of each piece of equipment. Puro equipment: $ Briggs equipment:

  Compute the percentage total return

Suppose a stock had an initial price of $64 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $73. Compute the percentage total return.

  About the nonconstant growth

Nonconstant growth Mitts Cosmetics Co.'s stock price is $73.60, and it recently paid a $1.00 dividend. This dividend is expected to grow by 30% for the next 3 years, then grow forever at a constant rate, g; and rs = 16%. At what constant rate is the ..

  Investments has provided the smallest average return

Over the past 70 years, which of the following investments has provided the smallest average return?

  Cause an increase in net working capital

Suppose you are a financial student interviewing for a job and the interviewers ask you what would cause an increase in net working capital. Which of the following would be the best response?

  What would be the third year future value

A deposit of $360 earns the following interest rates: What would be the third year future value?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd