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Levine Ross Ent. (LRE) has the following targeted capital structure: debt=25%, preferred stock=15% and common stock=60%. LRE's tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. LRE paid a dividend of $3.70 per share last year (Do), and its stock currently sells at a price of $60 per share. Ten-year government bonds yield 5%, the return of FBM KLCI is 12% and LRE's beta is 1.25. The following terms would apply for new security offerings.
New preferred could be sold to the public at a price of $100 per share, with a dividend of $9. Floatation costs of $5 per share would be incurred. Debt could be sold at an interesr rate of 9%. New common equity will be raised only by retaining earnings.
Question 1) What's the cost of debt?
Question 2) What's the cost of preferred stock?
Question 3) What's the cost of retained earnings using the CAPM method?
Question 4) What's the WACC?
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