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

                                    Debt                                 25%

                                    Preferred stock                   15

                                    Common stock                  60

                                                                         100%

      LCI?s net income expected this year is $17,142.86; its established dividend payout ratio is 30%; its tax rate is 40%; and investors expect earnings and dividends to grow at a constant rate of 9% in the future.  LCI paid a dividend of $3.60 per share last year (D0), and it?s stock currently sells at a price of $60 per share.  Treasury bonds yield 11%; an average stock has a 14% expected rate of return; and LCI?s beta is 1.51. These terms would apply to new security offerings:

      Common:          New common stock would have a flotation cost of 10%.

      Preferred:          new preferred would be sold to the public at a price of $100 per share, with a dividend of $11.  Flotation costs of $5 per share would be incurred.

      Debt:                Debt could be sold at an interest rate of 12%

      a.    Find the component costs of debt, preferred stock, retained earnings, and new common stock.

      b.   How much new capital can be raised before LCI must sell new equity? (In other words, find the retained earnings break point.)

      c.    What is the WACC when LCI meets its equity requirement with retained earnings?  With new common stock?

      d.   Construct a graph showing LCI?s MCC schedule.


Please show all relevant work, equations, and calculations so that I understand the procedure. 


a)The component costs of debt, preferred stock, retained earnings, and new common stock

 

Cost of debt rd=12% T=40%

 

After tax cost of debt=R(1-T)=12(1-0.4)=7.2%

 

Cost of preferred stock=dividend/price...

 







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