Long term debt and preferred stock

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Reference no: EM131088117

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 $11 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 $60. However they expect underwriting fees to be $4 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 $3.60 and it is expected that dividends will continue to grow at the historical rate of 9%. Required: 1. Determine the cost of each capital component 2. Determine the weighted average cost of capital (WACC) for LEI.

Reference no: EM131088117

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