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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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