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Question - Lancaster Engineering Inc. (LEI) has the following capital structure, which is considered to be optimal:

Debt 40%

Preferred stock 10%

Common equity 50%

100%

The risk-free rate is 7%, the market risk premium is 6%, and LEI's beta is 1.2. The current price of the common stock is $50, its current dividend is $4.19, and they are expected to grow at 5% per year in the future. LEI's bonds earn a return of 10%, and the risk premium on its stock over its own bond is estimated as 4%. LEI's tax rate is 40%.

LEI can obtain new capital in the following ways:

Preferred stock: New preferred stock with a dividend of $10 can be sold to the public at a price of $111.10 per share.

Debt: Debt can be sold at an interest rate of 10 percent.

Required - What is the company's WACC?

Reference no: EM132968628

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