Cost of capital questions

1.an analyst gathered the following information about a company and the market

Current market price per share of common stock $28.00

Most recent dividend per share paid on common stock $2.00

Expected dividend payout ratio 40%

Expected return on equity (ROE) 15%

Beta for common stock 1.3%

Expected rate of return on the market portfolio 13%

Risk free rate 4%

a. Using the CAPM approach, calculate the cost of retained earnings for the company
b. Using the DCF approach ,calculate the cost of retained earnings for the company

2.Honey & Milk Company currently has 1.2 million common shares of stock outstanding and the
stock has a beta of 2.2. it also has $10 million face value of bonds that have 5 years remaining to
maturity and 8% coupon rate with semi annual payments, and are priced to yield 13.65%. If M&H
issues up to $2.5 million of new bonds, the bond will be priced at par and have a yield of 13.65%; if it
issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16%. M&H has
learnt that it can issue new common stock at $10 a share. The current risk free is 3% and expected
market return is 10%. Tax rate is 30%. If M&H raises $7.5 million of new capital while maintaining
the same debt-equity ratio, what is its WACC?

3.Percy Motors has a target capital structure of 40% debt and 60% equity. The YTM on the
Company’s outstanding bonds is 9%, and the company’s tax rate is 40%. Percy’s CFO has calculated
the company’s WACC as 9.96%. what’s the company’s cost of common equity.

4.Hamilton Company’s percent coupon rate, quarterly payment, $1000 par value bond, which
matures in 20 years, currently sells at a price $686.86. the Company’s tax rate is 40%. Based on the
nominal interest rate, not the EAR, what is the firm’s component cost of debt for purposes of
calculating the WACC?

5.Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent
preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semi annually, a
current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a
12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free
rate is 10 percent, and the market risk premium 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 bond-yield-plus-risk-premium method to find r s. The firm's
marginal tax rate is 40 percent.

Cost of debt
i. What is Rollins' component cost of debt?

Cost of preferred stock

ii. What is Rollins' cost of preferred stock?

Cost of common stock: CAPM

iii. What is Rollins' cost of common stock (rs) using the CAPM approach?
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