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Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...

Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.7 , the risk-free rate is 5 percent, and the market risk premium is 6 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $28 per share, and has a growth rate of 6 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 rs. The firm's marginal tax rate is 37 percent.
What is Rollins cost of equity when using the DCF approach?

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Answer #1

Cost of Equity = [{D0 * (1 + g)} / P0] + g

= [{$2 * (1 + 0.06)} / $28] + 0.06

= 0.0757 + 0.06 = 0.1357, or 13.57%

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