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

question 45

Multiple Choice

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' cost of retained earnings using the bond-yield-plus-risk-premium approach?

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

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Definitions:

Independent Contractor/Consultant

A person or entity engaged by a company to perform specific tasks or provide expert advice, typically not considered an employee of the company.

Start-Up Capital

The initial investment required to start a new business or launch a new product.

Financial Return

The profit or loss generated on an investment over a specific period, often expressed as a percentage of the initial investment cost.

Teambuilding

The process of creating a cohesive and effective team through activities and exercises that enhance communication, trust, and collaboration among members.