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WACC/Debt for Rollins Corporation

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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 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 ks. 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.

1.Refer to Rollins Corporation. What is Rollins' component cost of debt?
2.Refer to Rollins Corporation. What is Rollins' cost of preferred stock?
3.Refer to Rollins Corporation. What is Rollins' cost of retained earnings using the CAPM approach?
4.Refer to Rollins Corporation. What is the firm's cost of retained earnings using the DCF approach?
5.Refer to Rollins Corporation. What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach?
6.Refer to Rollins Corporation. What is Rollins' lowest WACC?
7.Refer to Rollins Corporation. What is Rollins' retained earnings break point?
8.Refer to Rollins Corporation. What is Rollins' WACC once it starts using new common stock financing?

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Solution Preview

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 ...

Solution Summary

Excel spreadsheet attached findsRollins' component cost of debt, preferred stock cost, retained earnings via two methods, lowest WACC and more.

$2.19