Question: Rollins Corporation [RC] is estimating its weighted average cost of capital [WACC]. Its target capital structure is 20 percent debt, 20 percent preferred stock and 60 percent common equity. Its outstanding bonds have a 12 percent coupon rate, paid semiannually, a current maturity of 20 years, and sell in the marketplace for $1,000. RC could sell at par, $100 preferred stock which would pay a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. RC’s beta is 1.2, the risk-free rate [Rrf] is 10 percent, and the required rate of return for the average stock in the marketplace [Rm] is 15 percent. RC is a constant-growth firm that just paid an annual dividend of $2.00; its common stock currently sells for $27 per share, and has a growth rate of 8 percent. RC’s policy is to use a risk premium of 4 percent when using the bond-yield-plus-risk-premium method to find ks. RC’s marginal tax rate is 40 percent. Should RC sell additional common stock its flotation costs would be 10 percent of the per share price. RC expects its Retained Earnings to be $5,500,000 for the period.
[A] Compute RC’s cost of common equity [internal, Retained Earnings] using the CAPM method. the DC method.
[B] Compute RC’s cost of common equity [internal, Retained Earnings] using
[C] Compute RC’s WACC.
[D] Compute RC’s component cost of debt.
[E] Compute RC’s cost of preferred stock.
[F] Compute RC’s cost of common equity [internal, Retained Earnings] using the bond yield-plus-risk-premium method.