Rollins Corporation 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 5 percent coupon, paid semiannually, a current maturity of 12 years, and sell for $876.34.
The firm plans to sell preferred stock at $95 with $10 annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.5, the risk-free rate is 5 percent, and the market risk premium is 6 percent. Rollins is a constant-growth firm which just paid a dividend of $25.00 and has a growth rate of 8 percent. Flotation cost of 6 percent would be included for issuing additional shares of common stocks.
The firm's policy is to use a risk premium of 6 percentage points when using the bond-yield-plus-risk-premium method to find the cost of equity. The firm's marginal tax rate is 40 percent.
1. What is the cost of debt?
2. What is the cost of newly issued preferred stock?
3. What is cost of equity based on CAPM, DCF, and Bond Yield + Risk Premium?
4. What is WACC? (Assume cost of equity is the average of cost of equity from three models)