Rollins Corporation is estimating its weighted average cost of capital (WACC). Its target capital structure is 20% debt, 20% preferred stock and 60% common equity.

• Rollins bonds will have a coupon rate of 12%, a par value of $1,000 and 20 years to maturity. The price of the bond is $1,244.03
• The firm can sell a preferred stock with a dividend of $12. The price of the preferred stock is $80 per share.
• Rollins beta is 2, the risk free rate is 2% and the market risk premium is 8%.
• Rollins last dividend was $2, a growth rate of 10% and common stock is priced at $22.
• Rollins can sell new common stock for $22 per share.
• Tax rate is 40%.

a) What is Rollins before tax cost of debt?

b) What is Rollins after tax cost of debt?

c) What is Rollins after tax cost of preferred stock?

d) What is Rollins cost of common equity using the CAPM?

e) What is Rollins cost of common equity using the dividend model?

f) What is Rollins WACC? Use the cost of equity computed by the CAPM method in part D to compute WACC.