Hanover inc. has a target capital structure consisting of 30 percent debt, 10 pe
ID: 2647619 • Letter: H
Question
Hanover inc. has a target capital structure consisting of 30 percent debt, 10 percent preferred stock and 60 percent common equity. its bonds have a maturity of $1,000, a 10 percent coupon, paid semiannually, a current maturity of 20 years, and seek for $1000. the firm could sell, at par, $100 preferred stock that 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 8 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm that just paid a dividend of $2.50, sells for $26.00 per share, and has a growth rate of 9 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. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. what is Hanover's WACC?
Explanation / Answer
=(2.5 x 1.09 /26) +0.09=0.19480=19.48%
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