Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Accounting Posted 19 Aug 2017 My Price 11.00

WACC Lancaster Engineering Inc.

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?

 

 

 

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?

 

 

 

 

 

 

 

 

 

Answers

Maurice Tutor
(5)
Status NEW Posted 19 Aug 2017 07:08 PM My Price 11.00

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