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Question - Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20% debt, 20% preferred stock, and 60% common equity. Its bonds, which have a 12% coupon rate, can be sold at par ($1,000). The firm can sell, at par, $100 preferred stock which pays a 12% annual dividend, but after-tax flotation costs of 5% would be incurred. The firms' beta is 1.2, the risk-free rate is 10%, and the market risk premium is 5%. RC 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%. The firm's net income is expected to be $1 million, and its payout ratio is 28%. After tax flotation costs on new common stock total 10%, and the firm's marginal tax rate is 40%.
REQUIRED -
a) What is the firm's cost of Retained Earnings using the CAPM and the growth model?
b) What is breaking point for Retained Earnings?
c) What is the firms weighted average cost of capital using Retained Earnings?
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