Cost of retained earning using dividend growth model

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Reference no: EM131936367

Rollins Corporation has target capital structure consisting of 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. it has 20-year, 12 percent semiannual coupon bonds their that sell at par value of $1,000. The firm could sell, at par, $100 preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 15 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. Flotation costs on new common stock total 10 percent and the firm's marginal tax rate is 40 percent.

Required :

a- calculate after-tax cost of debt

b- calculate the cost of preferred stock

c- calculate the cost of retained earning using CAPM approach

d- calculate the cost of retained earning using dividend growth model

e- calculate WACC

f- discuss briefly three differences between debt and equity in ROLINA capital structure

Reference no: EM131936367

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