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

question 77

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 CAPM approach?

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

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Definitions:

Connective Tissue Proper

A type of connective tissue that includes various types, such as loose and dense connective tissues, supporting, and connecting other tissues and organs.

Erythrocytes

Red blood cells, which carry oxygen from the lungs to the rest of the body and carbon dioxide back to the lungs.

Adipose Tissue

A type of body tissue containing stored fat that serves as a source of energy, insulation, and cushioning for bodily organs.

Lipids

A group of naturally occurring molecules that include fats, waxes, sterols, and fat-soluble vitamins, among others, serving important roles in energy storage and cell structure.