Rollins Corporation
Rollins Corporation is constructing its MCC schedule. 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 that 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 that 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 rs. The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent.
-Refer to Rollins Corporation.What is Rollins' WACC once it starts using new common stock financing?
A) 13.6%
B) 14.1%
C) 16.0%
D) 16.6%
E) 16.9%

Question

Quizplus · Accepted Answer

The WACC is calculated using the cost of debt, preferred stock, and new common equity, weighted by the target capital structure. The cost of debt is adjusted for taxes, the cost of preferred stock includes flotation costs, and the cost of new equity includes flotation costs and is calculated using the CAPM and bond-yield-plus-risk-premium methods.

Rollins Corporation Rollins Corporation Is Constructing Its MCC Schedule. Its Target Capital