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##### Here are some data on Lancaster Engineering Inc. (LEI):

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**Question**

21. Here are some data on Lancaster Engineering Inc. (LEI);LEI has 1 million common shares outstanding and its common stock currently sells at a;price of $40 per share. It has 35,000 outstanding bonds and each bond is selling at;91.42857% of par value. It has 100,000 preferred stocks outstanding and each preferred;stock is selling at 80% of par value. Assume a par value of $100 for each preferred stock.;Assume that the current capital structure based on market value is optimal.;LEIs expected net income for the coming year (i.e., at time= 1) is $10,000,000, its;established dividend payout ratio is 40 percent, its marginal tax rate is 30 percent, and;investors expect earnings and dividends to grow at a constant rate of 5 percent in the future.;LEI can obtain new capital in the following ways;Common: New common stock has a flotation cost of 10 percent for up to $4 million of new;common stocks and 20 percent for all new common stocks over $4 million.;Preferred: Investors will require a return of 11% on all new preferred stocks. However;flotation cost of 5% will be incurred for up to $1.5 million of new preferred;stocks, and flotation costs will increase to 10% on all new preferred stocks;over $1.5 million.;Debt: Debt up to $4 million can be sold at a cost (rd) of 9%, any additional borrowing over;$4 million will cost 12%.;LEI has the following independent and equally risky investment opportunities;Project;A;B;C;D;E;Scale (cost);$ 6 million;$10 million;$ 7 million;$5 million;$12 million;IRR;16%;12%;14%;12.5%;13%;a. Calculate the required data and plot the firm's MCC schedule.;(10 points);b. Plot the IOS schedule.;(1 point);c. Assuming projects are perfectly divisible and have average risk, what projects should;the firm accept? How large should its capital budget be? If any projected is accepted;in part, what percentage would be accepted? What is the marginal cost of capital?;(3 points);d. Assuming projects are nondivisible and have average risk, which projects should be;accepted? What is the size of optimal capital budget? What is the marginal cost;of capital?;(6 points)

Paper#28187 | Written in 18-Jul-2015

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