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

question 57

Multiple Choice

Rollins Corporation
Rollins Corporation is constructing its MCC schedule.Its target capital structure is 20 percent debt, 20 percent preference shares, and 60 percent ordinary equity.Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for R1,000.The firm could sell, at par, R100 preference shares 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 R2.00, sells for R27.00 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 ks.The firm's net income is expected to be R1 million, and its dividend payout ratio is 40 percent.Flotation costs on new ordinary shares 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 ordinary share financing?

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

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Definitions:

Coupon Interest Rate

The annual interest rate paid by a bond expressed as a percentage of its face value.

Present Value Factor

A factor used to calculate the present value of a sum to be received in the future, considering a specific interest rate over a certain period.

Premium Amortization

The gradual reduction of the premium paid above the face value of a bond, allocated over the bond's life until maturity.

Effective Interest Method

An accounting practice for amortizing the discount or premium on bonds payable or receivable, which reflects the actual interest rate the bond earns.