Rollins corporation has a target capital structure consisting of 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sells $1,200. The firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins’ beta is 1.8, the risk-free rate is 10 percent, and the market return of 15 percent. Rollins is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has growth rate of 8 percent. The firms policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find ks. Flotation costs on new common stock total 10 percent, and the firms marginal tax rate is 40 percent. What is rollins Component cost of debt? 7.2% 9.7% 8.6% 10.0% 8.0%
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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