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1) 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 the constant rate of= 9% in = future. LCI paid dividend of $3.60 per share last year (D0), and it’s stock presently sells at the price of $60 per share. Treasury bonds yield 11%; the average stock has 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 flotation cost of 10%.
Preferred: new preferred would be sold to public at the price of= $100 per share, with dividend of= $11. Flotation costs of= $5 per share would be incurred.
Debt: Debt could be sold at the interest rate of= 12%

a) Determine component costs of debt, favoured stock, retained earnings, and new common stock.

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

c) Compute WACC when LCI meets its equity requirement with retained earnings? With new common stock?

b) Construct a graph illustrating LCI’s MCC schedule.

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  • Category:- Basic Finance
  • Reference No.:- M915309

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