What is the cost of issuing preferred stock

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Reference no: EM131958001

Rollin Corporation's target capital structure is 50% debt, 10% preferred stock, 25% common stock and 15% retained earnings. Its bonds sell for $1,000 have a 8% coupon rate, mature in 20 years and will incur a floatation cost of $50 per bond. The firm could sell, at par, $100 preferred stock which pays a 6% annual dividend, with flotation costs of 5%. Rollins' beta is 1.2, the Return on Government Notes is 10%, and the market return is 15%. Rollins and has a growth rate of 8% and its current common stock price is $20.00 with recent dividend of $1.00, per share. Floatation costs are 10% on the new issue. The firm's policy is to use a risk premium of 3.3% when using the bond-yield-plus-risk-premium method to value Retained earnings. The firm's marginal tax rate is 40%.

1. What is Rollins' cost of debt (bonds)?

2. What is Rollins' cost of issuing common stock?

3. Use the Bond-Yield-Plus-Premium method to value Rollin's retained earnings.

4. What is the cost of issuing preferred stock?

5. Calculate Rollin's WAAC.

Reference no: EM131958001

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