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%, 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 (Do) and its stock is currently selling at $60 share. Ten year Treasury bonds yield 6%, the market risk premium is 5%, and LCI's beta is 1.3. The following terms would apply to all new security offerings:
Preferred: New preferred could be sold to the public at a price of $100 share, with a dividend of $9. Flotation costs of $5 share would be incurred. Debt: Debt could be at an interest rate of 9%. Common: New common equity will be raised only by retained earnings.
a. Find the component cost of debt, preferred stock and equity.
b. What is the WACC?