Reference no: EM131544416

LEI has the following capital structure, which it considers to be optimal:

Debt =               30%

Preferred stock =        10

Common stock =        60

LEI’s expected net income this year is $36,000, its established dividend payout ratio is 30 percent, its tax rate is 30 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 at a price of $32 per share.

LEI might obtain new capital by:

Common stock: The new common shares outstanding would have a flotation cost of 10% up to $12,000 and a 20% flotation for more than $12,000.

Preferred stock: the preferred dividend = $9 per share @ price of $100 per share. However, there’s a flotation cost of $5 for new preferred stock up to $8,000, and a flotation cost of $10 for new issuing above $8,000.

Debt: for the interest rate is 13% for debts up to $5,000; 15% for up to $10,000, and 18% for debts above $10,000.

LEI has the following investment choices:

Project   Cost   N CFs   Life

A   $15,000   $2500   7

B   12,000   3400   5

C   10,000   3500   8

D   20,000   4000   10

E   20,000   5500   6

What’s your analysis?

Required: 1. Determine the cost of each capital component 2. Determine the weighted average cost of capital (WACC) for LEI.