Rollins Corporation Is Estimating Its WACC

question 10

Multiple Choice

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 rs. The firm's marginal tax rate is 40 percent.
-What is Rollins' component cost of debt?

• A) 10.0%
• B) 9.1%
• C) 8.6%
• D) 8.0%
• E) 7.2%

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Definitions:

Monocline

A geological fold where all strata are inclined in the same direction, resembling a step-like structure in the landscape.

Thrust Fault

A type of geological fault where one block of the earth's crust is pushed up and over another, typically at a low angle, due to compressional forces.

Normal Fault

A normal fault is a type of fault where the hanging wall slides downward relative to the footwall due to tensional forces.

Sedimentary Layers

Strata or layers of rock that have been formed from sediment deposition over vast periods of time.