Rollins Corporation’s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent...

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Rollins Corporation’s target capital structure is 20 percentdebt, 20 percent preferred stock, and 60 percent common equity. Itsbonds have a 12 percent coupon, paid semiannually, a currentmaturity of 20 years, and sell for $1,200 in the market now. Theprice of firm’s newly issued preferred stock is $100 and theflotation cost is 5 percent. The company pays an annual dividend of$12 to its preferred stockholders. Rollins' beta is 1.2, therisk?free rate is 10 percent, and the market risk premium (which isthe difference between market return and risk free rate) is 5percent. Rollins is a constant growth firm which just paid adividend of $2.00, sells for $27.00 per share, and has a growthrate of 8 percent. The firm's policy is to use a risk premium of 4percentage points when using the Debt -cost-plus-risk-premiummethod to find k_s. The firm's net income is expected tobe $1 million, and its dividend payout ratio is 40 percent.Flotation costs on new common stock total 10 percent, and thefirm's marginal tax rate is 40 percent.
What is Rollins' lowest WACC?
A.
13.6%
B.
14.1%
C.
16.0%
D.
16.6%
E.
16.9%

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3.9 Ratings (484 Votes)

Cost of debt Present Value PV 1000 FV par value 1000 Coupon rate r 12 Coupon payment p FVr2 60 Number of payments N 40 Semiannual yield y rateN p PV FV 600 Annualized yield Y y2 1200 Tax rate T 40 Aftertax cost of debt Y1T 720 Cost of preferred See Answer

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Rollins Corporation’s target capital structure is 20 percentdebt, 20 percent preferred stock, and 60 percent common equity. Itsbonds have a 12 percent coupon, paid semiannually, a currentmaturity of 20 years, and sell for $1,200 in the market now. Theprice of firm’s newly issued preferred stock is $100 and theflotation cost is 5 percent. The company pays an annual dividend of$12 to its preferred stockholders. Rollins' beta is 1.2, therisk?free rate is 10 percent, and the market risk premium (which isthe difference between market return and risk free rate) is 5percent. Rollins is a constant growth firm which just paid adividend of $2.00, sells for $27.00 per share, and has a growthrate of 8 percent. The firm's policy is to use a risk premium of 4percentage points when using the Debt -cost-plus-risk-premiummethod to find ks. The firm's net income is expected tobe $1 million, and its dividend payout ratio is 40 percent.Flotation costs on new common stock total 10 percent, and thefirm's marginal tax rate is 40 percent.What is Rollins' lowest WACC?A.13.6%B.14.1%C.16.0%D.16.6%E.16.9%