Collins Corporation is constructing its MCC schedule. Its target capital structure is 30 percent debt, 15 percent preferred stock, and 55 percent common equity. Its bonds have a 8 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 8 percent annual dividend, but flotation costs of 3 percent would be incurred. Collins%u2019 beta is 1.5, the risk-free rate is 4.5 percent, and the market risk premium is 7 percent. Collins is a constant growth firm which just paid a dividend of $1.50, sells for $17.67 per share, and has a growth rate of 6 percent. The firm's policy is to use a risk premium of 7 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's net income is expected to be $1.8 million, and its dividend payout ratio is 30 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 35 percent. A) What is Collins' cost of preferred stock? B) What is Collins' cost of retained earnings using the CAPM approach? C) What is the firm's cost of retained earnings using the DCF approach? D) What is Collins' cost of retained earnings using the bond-yield-plus-risk-premium approach? E) What is Collins' lowest WACC? F) What is Collins' retained earnings break point? G) What is Collins' WACC once it starts using new common stock financing?
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