Question

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 7.5 percent coupon, paid
semiannually, a current maturity of 20 years, and sell for
$1,105.78. The firm could sell, at par, $100 preferred stock which
pays a 8 percent annual dividend, but flotation costs of 5 percent
would be incurred. Rollins' beta is 1.8, the risk-free rate is 2.45
percent, and the market risk premium is 5 percent. The firm's
marginal tax rate is 40 percent. (**show your
work)**

What is the company’s cost of preferred equity?

What is the company’s cost of common equity?

What is the company’s WACC?

Answer #1

cost of preferred equity = 8/(100 - 5) =

cost of common equity = 2.45% + 1.8*5% = 11.45%

WACC:

Amount | weight | cost | weight*cost | |

equity | 60.00 | 0.6000 | 11.4500% | 0.0687 |

debt | 20.00 | 0.2000 | 3.9264% | 0.0079 |

preferred shares | 20.00 | 0.2000 | 8.4211% | 0.0168 |

WACC = 9.34%

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