Rollins Corporation has a target capital structure is 20 percent debt, 20 percen

Question

Rollins Corporation has a target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 10 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $849.54. The firm could sell, at par, $100 preferred stock, which pays a $12 annual dividend. Rollins is a constant growth firm which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. a) What is Rollins' cost of debt? b) What is Rollins' cost of preferred stock? c) What is the firm's cost of retained earnings? d) What is the cost of new equity of the firm? How to find numbers?

Explanation / Answer

1(a)
WACC = weight of common equity*cost of common equity + weight of pref. equity*cost of pref. equity + weight of debt*cost of debt(1-tax)

Cost of debt = 10%
Tax rate = 40%
Weight of debt = 20%

Weight of pref equity = 20%
Cost of pref. equity = 12.6% (calculated in qs 1(b))


1(b)

Preferred dividend = 12%
Cost of preferred stock = $12/$100(1-0.05) = 12.6%.

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