*Multiple
part:*

*(The
following information applies to the next six problems.)*

Rollins Corporation is estimating its

WACC. Its target capital structure is 20

percent debt, 20 percent preferred stock, and 60 percent common equity. Its

bonds have a 12 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 12 percent annual dividend,

but flotation costs of 5 percent would be incurred. Rollins’ beta is 1.2, the risk-free rate is

10 percent, and the market risk premium is 5 percent. Rollins is a

constant-growth firm which just paid a dividend of $2.00, sells for $27.00 per

share, and has a growth rate of 8 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 r_{s}. The firm’s marginal tax rate is 40 percent.

** **

[i]. What

is Rollins’ component cost of debt?

a. 10.0%

b.

9.1%

c.

8.6%

d.

8.0%

e.

7.2%

** **

[ii]. What

is Rollins’ cost of preferred stock?

a. 10.0%

b. 11.0%

c. 12.0%

d. 12.6%

e. 13.2%

** **

[iii]. What

is Rollins’ cost of common stock (r_{s}) using the CAPM approach?

a. 13.6%

b. 14.1%

c. 16.0%

d. 16.6%

e. 16.9%

** **

[iv]. What

is the firm’s cost of common stock (r_{s}) using the DCF approach?

a. 13.6%

b. 14.1%

c. 16.0%

d. 16.6%

e. 16.9%

** **

[v]. What

is Rollins’ cost of common stock using the bond-yield-plus-risk-premium

approach?

a. 13.6%

b. 14.1%

c. 16.0%

d. 16.6%

e. 16.9%

** **

[vi]. What

is Rollins’ WACC?

a. 13.6%

b. 14.1%

c. 16.0%

d. 16.6%

e. 16.9%

*(The
following information applies to the next three problems.)*

J. Ross and Sons Inc. has a target capital

structure that calls for 40 percent debt, 10 percent preferred stock, and 50

percent common equity. The firm’s

current after?tax cost of debt is 6 percent, and it can sell as much debt as it

wishes at this rate. The firm’s

preferred stock currently sells for $90 per share and pays a dividend of $10

per share; however, the firm will net only $80 per share from the sale of new

preferred stock. Ross’s common stock

currently sells for $40 per share. The

firm recently paid a dividend of $2 per share on its common stock, and

investors expect the dividend to grow indefinitely at a constant rate of 10

percent per year.

** **

[vii]. What

is the firm’s cost of common stock, r_{s}?

a. 10.0%

b. 12.5%

c. 15.5%

d. 16.5%

e. 18.0%

** **

[viii]. What

is the firm’s cost of newly issued preferred stock, r_{ps}?

a. 10.0%

b. 12.5%

c. 15.5%

d. 16.5%

e. 18.0%

** **

[ix]. What

is the firm’s weighted average cost of capital (WACC)?

a.

9.5%

b. 10.3%

c. 10.8%

d. 11.4%

e. 11.9%

** Answer: a **

[x]. Allison

Engines Corporation has established a target capital structure of 40 percent

debt and 60 percent common equity. The

firm expects to earn $600 in after-tax income during the coming year, and it

will retain 40 percent of those earnings.

The current market price of the firm’s stock is P_{0} = $28; its

last dividend was D_{0} = $2.20, and its expected growth rate is 6

percent. Allison can issue new common

stock at a 15 percent flotation cost.

What will Allison’s marginal cost of * equity* (not the WACC) be if it must fund a capital budget requiring

capital

$600 in total new capital?

a. 15.8%

b. 13.9%

c. 7.9%

d. 14.3%

e. 9.7%

** **

[xi]. Hilliard

Corp. wants to calculate its weighted average cost of capital (WACC). The company’s CFO has collected the following

information:

·

The

company’s long-term bonds currently offer a yield to maturity of 8 percent.

·

The

company’s stock price is $32 per share (P_{0} = $32).

·

The

company recently paid a dividend of $2 per share (D_{0} = $2.00).

·

The

dividend is expected to grow at a constant rate of 6 percent a year (g = 6%).

·

The

company pays a 10 percent flotation cost whenever it issues new common stock (F

= 10%).

·

The

company’s target capital structure is 75 percent equity and 25 percent debt.

·

The

company’s tax rate is 40 percent.

·

The

company anticipates issuing new common stock during the upcoming year.

What

is the company’s WACC?

a. 10.67%

b. 11.22%

c. 11.47%

d. 12.02%

e. 12.56%

%.