Question

Question 17 5 pts The following will be used to answer the next question Debt: 15,000 10% coupon bonds outstanding, 30 years to maturity, selling for 106 (bonds have a $1000 par value with semiannual interest payments) Preferred Stock: 20,000 shares of 7% preferred stock outstanding with a par value of $100 and currently selling for $128 per share Common Stock: 300,000 shares outstanding selling for $80 per share, the beta is 1.5, the risk-free rate is 6% and the market risk premium is 7.5%. The company's tax rate is 20 percent. (Numbers in parentheses are negative) What is Rollins' after-tax cost of debt (approximately)? o 5.40% o 5.64% 9.40% 04.50% o 7.52%

Answer 1

Q17

cost of debt can be found from excel using " =2*rate(60,50,-1060,1000)" formula ;

cost of debt =9.4%

Q18:

cost of equity = risk free rate +beta*market risk premium =6+1.5*7.5 =17.25%

Q19:

cost of preferred stock =7/128 =5.5%

Q20:

market value of Debt=1060*15000=15900000

market value Equity =300000*80=24000000

market value preferred share=20000*128=2560000

weight of equity =24000000/(15900000+24000000+2560000) =57%