Rollins Corporation Is Estimating Its WACC

question 56

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' cost of common stock (rs) using the CAPM approach?

• A) 13.6%
• B) 14.1%
• C) 16.0%
• D) 16.6%
• E) 16.9%

---

Definitions:

Operator

In programming, an operator is a symbol that specifies which operations to perform on one or more operands, such as addition, subtraction, or comparison.

Components

In software and electronic hardware, components refer to individual parts or elements that make up a system or device.

Vectors

In programming, a dynamic array that can grow or shrink in size, often used in languages like Java and C++.

Lists

Ordered collections of elements, which can include various data types and are commonly used in programming.