Rolling Corporation is constructing its Cost of Capital schedule. The firm is at its target capital structure. Its bonds have a 2.8 percent coupon, paid semiannually, a current maturity of 14 years, and sell for $928.30. Rolling's stock beta is .9, the risk free rate is 2.5 %, and the market risk premium is 5.8 %. Rolling is a constant growth firm, and will pay a dividend next year of $1.20. The stock sells for $40.00 and has a growth rate of 4%. The firm's tax rate is 30%.
The firm's book value balance sheet is as follows:
Assets $11,100, Long Term Debt $31,000
Equity ($.50 par) $374
Retained Earnings -$20,274
SHOW YOUR WORK FOR PARTIAL CREDIT.
a. Create a market value balance sheet and fill in the blanks below (all or none)?
Assets _________
Long Term Debt _________
Equity _________
Retained Earnings _________
b. What is the yield to maturity on Rolling's bonds?
c. What is Rolling' cost of retained earnings using the Capital Asset Pricing Model approach?
d. What is Rolling' cost of retained earnings using the Dividend Discount Model approach?
e. Using your CAPM estimate of the cost of retained earnings, what is Rolling' WACC? If you were unable to compute the weights of debt and equity in part a, you can use 40% debt and 60% equity in your calculation.