Question
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60% common equity.Assume the firm has insufficient retained earnings to
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60% common equity.Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000.The firm could sell, at par, $100 preferred stock that pays a 12% annual dividend, but flotation costs of 5% would be incurred.Rollins' beta is 1.2, the risk-free rate is 10%, and the market risk premium is 5%. Rollins is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%.The firm's policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find rs.Flotation costs on new common stock total 10%, and the firm's marginal tax rate is 40%.
Cost of debt
1.What is Rollins' component cost of debt?
a.10.0%
b.9.1%
c.8.6%
d.8.0%
e.7.2%
2.What is Rollins' cost of preferred stock?
a.10.0%
b.11.0%
c.12.0%
d.12.6%
e.13.2%
3.What is Rollins' cost of retained earnings using the CAPM approach?
a.13.6%
b.14.1%
c.16.0%
d.16.6%
e.16.9%
4.What is the firm's cost of retained earnings using the DCF approach?
a.13.6%
b.14.1%
c.16.0%
5.What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach?
a.13.6%
b.14.1%
c.16.0%
d.16.6%
e.16.9%
6.What is Rollins' WACC, if the firm has insufficient retained earnings to fund the equity portion of its capital budget?
a.13.6%
b.14.1%
c.16.0%
d.16.6%
e.16.9%
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