Reference no: EM132478052
1. Show all relevant workings
Rollins Corporation is estimating its WACC. Its target capital structure is 40% debt and 60% common equity. Its bonds have par value of $1,000, a 8% coupon, paid semi-annually, a current maturity of 7 years, and sell for $901.04. Rollins' beta is 1.5, the risk-free rate is 9%, and the market risk premium is 6%. Rollin is currently selling for $25 a share. The firm's marginal tax rate is 40%.
a. What is Rollins' WACC?
b. Discuss the problems of estimating the cost of capital for privately owned firms?
2. Show all relevant working
Tanner's Leather is an all-equity financed firm. The beta is 1.16, the market risk premium is 7.52 percent, the market rate of return is 10.64 percent, and the tax rate is 34 percent. The firm announced that the next dividend will be $0.6864 per share and future dividends will increase by 4 percent annually. The stock sells for $13 a share. What is the average cost of equity computed by using the dividend growth model and the CAPM model?
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