Reference no: EM1310997

Calculation of After-Tax Cost of Debt.

Rollins Corporation (RC) is estimating its weighted average cost of capital (WACC). Its target capital structure is 20% debt, 20% preferred stock and 60% common equity. Its outstanding bonds have a 12% coupon rate, paid semi-annually, 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% annual dividend, but flotation costs of 5% would be incurred. RC's beta is 1.2, the risk-free rate (Rrf) is 10%, and the required rate of return for the average stock in the marketplace (Rm) is 15%. 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%. RC's policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find ks. RC's marginal tax rate is 40%. Should RC sell additional common stock its flotation costs would be 10% of the per share price. RC expects its Retained Earnings to be $5,500,000 for the period.

1. Calculate RC's component cost of debt.

2. Calculate RC's cost of preferred stock.

3. Calculate RC's cost of common equity (internal, Retained Earnings) using the CAPM method. the DC method.

4. Calculate RC's cost of common equity (internal, Retained Earnings) using the bond yield-plus-risk-premium method.

5. Calculate RC's cost of common equity (internal, Retained Earnings) using

6. Calculate RC's WACC