Wacc lancaster engineering inc

Reference no: EM131128668

WACC Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:

Debt	25%
Preferred stock	15
Common equity	60
	100%

LEI's expected net income this year is $34,285.72; its established dividend payout ratio is 30%; its federal-plus-state tax rate is 40%; and investors expect future earnings and divi- dends to grow at a constant rate of 9%. LEI paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share.

LEI can obtain new capital in the following ways:

Preferred: New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share.
Debt: Debt can be sold at an interest rate of 12%.

a. Determine the cost of each capital component.

b. Calculate the WACC.

c. LEI has the following investment opportunities that are average-risk projects:

Project	Cost at t = 0	Rate of Return
A	$10,000	17.4%
B	20,000	16.0
C	10,000	14.2
D	20,000	13.7
E	10,000	12.0

Which projects should LEI accept? Why?

Reference no: EM131128668

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