Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25% (LCI has only long-term debt), preferred stock = 15%, and common stock = 60%. LCI’s tax rate is 25%, 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 (D0), 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 LCI’s beta is 1.3. The following terms would apply to new security offerings. Preferred stock: New preferred stock 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 stock: All new common equity will be raised internally by reinvesting earnings. Find the component costs of debt, preferred stock, and common stock. What is the WACC?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25% (LCI has only long-term debt),
Preferred stock: New preferred stock 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 stock: All new common equity will be raised internally by reinvesting earnings.
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Find the component costs of debt, preferred stock, and common stock.
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What is the WACC?
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