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Cost of Capital - Sample Problems-Cost of Capital Use the...

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Sample Problems Cost of Capital Use the following information to answer the following 4 questions. Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its before-tax cost of debt is 12%. The firm could sell, at $100, preferred stock that pays a $12 annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10%, and the market rate of return is 15%. The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. The firm's marginal tax rate is 40 percent. 1. What is Rollins' cost of preferred stock? 2. What is Rollins' cost of retained earnings using the CAPM approach? 3. What is Rollins' WACC? 4. What is Rollins' retained earnings break point? 5. Kottinger's Kamp Supplies is considering an investment in new manufacturing equipment. The firm finances projects with 50% debt and 50% equity capital. Its cost of equity is 14% and its pre-tax cost of debt, r d , is 8%. The firm's tax rate is 40%. What is Kottinger's weighted average cost of capital? 6. Martin Corporation's common stock is currently selling for $50 per share. The company just paid a dividend of $2.00 per share. If dividends are expected to grow at 6 percent per year and if flotation costs are 10 percent, then what is the firm's cost of retained earnings and what is its cost of new common stock? 7. J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's component costs are as follows: r d,T = 6%; r P = 12.5%; and r S = 15.5%.Ross expects to retain $15,000 in earnings over the next year. Where will a break in the MCC schedule occur?
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