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?