Reference no: EM132951897

Question - Lurve Corporation needs RM9 million financing for its new investment. Following its capital structure policy, the company plans to acquire RM2,250,000 from debt, RM1,350,000 from the issuance of preferred stocks and the remaining from common equity. LCI tax rate is 30 percent. LCI sources of financing are as follows:

Common equity: Investors expect earnings and dividends of LCI to grow at a constant rate of 6 percent in the future. LCI has paid a dividend of RM3.70 per share last year and its stock currently sells at a price of RM60 per share. LCI has sufficient internal funds to finance its new investment.

Preferred Stocks: New preferred stocks could be sold to the public at a price of RM100 per share, with a dividend of RM9 per share. However, flotation costs of RM5 per share would be incurred.

Long-term Debt: Lurve could borrow an unlimited amount of debt from its bank at an interest rate of 9 percent.

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

b. What is Lurve's WACC to evaluate potential investments of the same risk?