Problem:
Collins Corporation is constructing its MCC schedule. Its target capital structure is 30 percent debt, 15 percent preferred stock, and 55 percent common equity. Its bonds have a 8 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 8 percent annual dividend, but flotation costs of 3 percent would be incurred. Collins%u2019 beta is 1.5, the risk-free rate is 4.5 percent, and the market risk premium is 7 percent. Collins is a constant growth firm which just paid a dividend of $1.50, sells for $17.67 per share, and has a growth rate of 6 percent. The firm's policy is to use a risk premium of 7 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's net income is expected to be $1.8 million, and its dividend payout ratio is 30 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 35 percent.
Requirement:
Question 1: What is Collins' cost of preferred stock?
Question 2: What is Collins' cost of retained earnings using the CAPM approach?
Question 3: What is the firm's cost of retained earnings using the DCF approach?
Question 4: What is Collins' cost of retained earnings using the bond-yield-plus-risk-premium approach?
Question 5: What is Collins' lowest WACC?
Question 6: What is Collins' retained earnings break point?
Question 7: What is Collins' WACC once it starts using new common stock financing?
Note: Explain all steps comprehensively.