Question

What is the company’s after-tax cost of debt?    

Rollins Corporation is estimating its WACC. Its target capital structure

What is the company’s cost of preferred equity? premium is 5 percent. The firm's marginal tax rate is 40 percent.

What is the company’s cost of common equity?

Answer 1

Weight of equity = E/A

Weight of equity =

W(E)=0.6

Weight of debt = D/A

Weight of debt = 0.2

W(D)=0.2

Weight of preferred equity =1-D/A-E/A

Weight of preferred equity = =1-0.2 - 0.6

W(PE)=0.2

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 2.45 + 1.8 * (5)

Cost of equity% = 11.45

Cost of debt

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =20x2

1105.78 =∑ [(7.5*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2

k=1

YTM = 6.5440626697

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 6.5440626697*(1-0.4)

= 3.92643760182

cost of preferred equity

cost of preferred equity = Preferred dividend/price*(1-flotation %)*100

cost of preferred equity = 8/(95*(1-0.05))*100

=8.42

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=3.93*0.2+11.45*0.6+8.42*0.2

WACC =9.34%