Walmart Corporation has a target capital structure consistingof 20 percent debt, 20 percent preferred stock, and 60 percentcommon equity. Assume the firm has insufficient retained earningsto fund the equity portion of its capital budget. Its bonds have a12 percent coupon, paid semiannually, a current maturity of 20years, and sell for $1,000. The firm could see, at par, $100preferred stock that pays a 12 percent annual dividend, butflotation costs of 5 percent would be incurred. Rollins' beta is1.2, the risk free is 10 percent, and the market risk premium is 5percent. Rollins is a constant growth firm that just paid adividend of $2.00, sells for $27.00 per share, and has a growthrate of 8 percent. The firm's policy is to use a risk premium of 4percentage points when using the bond-yield-plus-risk-premiummethod to find ks. Flotation costs on new common stock totals 10percent, and the firm's marginal tax rate is 40 percent.
1. What is Rollins' WACC?
2. What is Rollins' cost of preferred stock?