Hanover inc. has a target capital structure consisting of 30 percent debt, 10 pe

Question

Hanover inc. has a target capital structure consisting of 30 percent debt, 10 percent preferred stock and 60 percent common equity. its bonds have a maturity of $1,000, a 10 percent coupon, paid semiannually, a current maturity of 20 years, and seek for $1000. the firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 8 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm that just paid a dividend of $2.50, sells for $26.00 per share, and has a growth rate of 9 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk premium method to find rs. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Hanovers WACC? (Please Show Work)

Explanation / Answer

expected return = risk-free rate + beta * (market risk premium)

= 8+1.2*5 = 14%

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