Question
Rollins Corporations target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon,
Rollins Corporations target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,200 in the market now. The price of firms newly issued preferred stock is $100 and the flotation cost is 5 percent. The company pays an annual dividend of $12 to its preferred stockholders. Rollins' beta is 1.2, the risk?free rate is 10 percent, and the market risk premium (which is the difference between market return and risk free rate) is 5 percent. Rollins is a constant growth firm which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the Debt -cost-plus-risk-premium method to find ks. The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent.
What is Rollins' after-tax cost of debt?
A. | a. 10.0%
| |
B. | b. 9.1%
| |
C. | c. 8.6%
| |
D. | d. 8.0%
| |
E. | e. 7.2% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started