Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15% Common equity 60% Total 100% LEI is expected to pay a dividend of...

Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:
Debt 25% Preferred stock 15% Common equity 60% Total 100%
LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent.
LEI can obtain new capital in the following ways:
• New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share.
• Debt can be sold at an interest rate of 12 percent.
a. Determine the cost of each capital component.
b. Calculate the WACC.
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c. LEI has the following investment opportunities that are average-risk projects for the firm:
Project A
B
C
D
E
Cost at t = 0
$10,000 20,000 10,000 20,000 10,000
Rate of Return
16.4% 15.0% 13.2% 12.0% 11.5%
Which projects should LEI accept? Why?