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Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal:...

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Finance

Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. LCIs tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. LCI paid a dividend of $3.70 per share last year (D 0 ), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and LCIs beta is 1.3. The following 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 $9. Flotation costs of $5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings. a. Find the component costs of debt, preferred stock, and common stock. b. What is the WACC?

HINT:

wacc re = wd*rdat + wps*rps + we*re

wacc newstock = wd*rdat + wps*rps + we*rnewstock

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