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%