Question

# Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...

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?

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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