When using the bond-yield-plus-risk-premium method

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Reference no: EM131049683

Root Stock Inc. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $900. 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. Root’s beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Root Stock 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. The firm's policy is to use a risk premium of 3 percentage points when using the bond-yield-plus-risk-premium method to find rs. No new common equity will be used. The firm's marginal tax rate is 40 percent. What is the WACC for the firm. Show the cost of each component, weights used, etc for full credit.

Reference no: EM131049683

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When using the bond-yield-plus-risk-premium method : Root Stock Inc. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $90..

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