Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...

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 7.5 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,105.78. The firm could sell, at par, $100 preferred stock which pays a 8 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.8, the risk-free rate is 2.45 percent, and the market risk premium is 5 percent. The firm's marginal tax rate is 40 percent.

What is the company's cost of preferred equity? SHOW WORK

Expert Solution

Cost of new preferred stock (Rp)	Annual dividend÷(Stock price-Flotation cost)

Here,
Annual dividend	$ 8.00	=100*8%
Preferred stock price	$ 95.00
Flotation cost	5.00%

Cost of new preferred stock (Rp)	8.86%
	$8÷($100*(1-5%))

jeff jeffy answered 2 years ago

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