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Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock =15%, and common stock =60%. LCI"s tax rate is 40 percent and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. LCI paid a dividend of $3.60 per share last year (D0), and its stock currently sells at a price of $60 per share. Treasury bonds yield 11 percent; an average stock has a 14 percent expected rate of return; and LCI"s beta is 1.51. These terms would apply to new security offerings:
Preferred: New preferred could be sold to the public at a price of $100 per share, with a dividend of $11.
Flotation costs of $5 per share would be incurred.
Debt: Debt could be sold at an interest rate of 12 percent.
a. Find the component costs of debt, preferred stock, and common stock. Assume LCI does not have to issue any additional shares of common stock.
b. What is the WACC?
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