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

question 111

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 preferred stock?

• A) 10.0%
• B) 11.0%
• C) 12.0%
• D) 12.6%
• E) 13.2%

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Definitions:

Synergy Value

The additional value created from combining two or more entities, where the whole is greater than the sum of its parts.

Equity-Financed

Pertaining to a business or project that is funded through the sale of equity or shares rather than debt.

Price Per Share

The current market price of a share of stock in a company.

Market Value

The ongoing price that an asset or service can fetch when bought or sold on the market.