Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60% common equity.Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000.The firm could sell, at par, $100 preferred stock that pays a 12% annual dividend, but flotation costs of 5% would be incurred.Rollins' beta is 1.2, the risk-free rate is 10%, and the market risk premium is 5%. Rollins is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%.The firm's policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find r_s.Flotation costs on new common stock total 10%, and the firm's marginal tax rate is 40%.

Cost of debt

1.What is Rollins' component cost of debt?

2.What is Rollins' cost of preferred stock?

3.What is Rollins' cost of retained earnings using the CAPM approach?

4.What is the firm's cost of retained earnings using the DCF approach?

  

5.What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach?

  

6.What is Rollins' WACC, if the firm has insufficient retained earnings to fund the equity portion of its capital budget?

Answer rating: 100% (QA)

To calculate the various component costs and the weighted average cost of capital WACC for Rollins Corporation lets go through each question step by s... View the full answer