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Financial Planning Problems

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Question;Multiple;part;(The;following information applies to the next six problems.);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 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 rs. The firm's marginal tax rate is 40 percent.;[i]. What;is Rollins' component cost of debt?;a. 10.0%;b.;9.1%;c.;8.6%;d.;8.0%;e.;7.2%;[ii]. What;is Rollins' cost of preferred stock?;a. 10.0%;b. 11.0%;c. 12.0%;d. 12.6%;e. 13.2%;[iii]. What;is Rollins' cost of common stock (rs) using the CAPM approach?;a. 13.6%;b. 14.1%;c. 16.0%;d. 16.6%;e. 16.9%;[iv]. What;is the firm's cost of common stock (rs) using the DCF approach?;a. 13.6%;b. 14.1%;c. 16.0%;d. 16.6%;e. 16.9%;[v]. What;is Rollins' cost of common stock using the bond-yield-plus-risk-premium;approach?;a. 13.6%;b. 14.1%;c. 16.0%;d. 16.6%;e. 16.9%;[vi]. What;is Rollins' WACC?;a. 13.6%;b. 14.1%;c. 16.0%;d. 16.6%;e. 16.9%;(The;following information applies to the next three problems.);J. Ross and Sons Inc. has a target capital;structure that calls for 40 percent debt, 10 percent preferred stock, and 50;percent common equity. The firm's;current after?tax cost of debt is 6 percent, and it can sell as much debt as it;wishes at this rate. The firm's;preferred stock currently sells for $90 per share and pays a dividend of $10;per share, however, the firm will net only $80 per share from the sale of new;preferred stock. Ross's common stock;currently sells for $40 per share. The;firm recently paid a dividend of $2 per share on its common stock, and;investors expect the dividend to grow indefinitely at a constant rate of 10;percent per year.;[vii]. What;is the firm's cost of common stock, rs?;a. 10.0%;b. 12.5%;c. 15.5%;d. 16.5%;e. 18.0%;[viii]. What;is the firm's cost of newly issued preferred stock, rps?;a. 10.0%;b. 12.5%;c. 15.5%;d. 16.5%;e. 18.0%;[ix]. What;is the firm's weighted average cost of capital (WACC)?;a.;9.5%;b. 10.3%;c. 10.8%;d. 11.4%;e. 11.9%;Answer: a;[x]. Allison;Engines Corporation has established a target capital structure of 40 percent;debt and 60 percent common equity. The;firm expects to earn $600 in after-tax income during the coming year, and it;will retain 40 percent of those earnings.;The current market price of the firm's stock is P0 = $28, its;last dividend was D0 = $2.20, and its expected growth rate is 6;percent. Allison can issue new common;stock at a 15 percent flotation cost.;What will Allison's marginal cost of equity;capital (not the WACC) be if it must fund a capital budget requiring;$600 in total new capital?;a. 15.8%;b. 13.9%;c. 7.9%;d. 14.3%;e. 9.7%;[xi]. Hilliard;Corp. wants to calculate its weighted average cost of capital (WACC). The company?s CFO has collected the following;information;?;The;company?s long-term bonds currently offer a yield to maturity of 8 percent.;?;The;company?s stock price is $32 per share (P0 = $32).;?;The;company recently paid a dividend of $2 per share (D0 = $2.00).;?;The;dividend is expected to grow at a constant rate of 6 percent a year (g = 6%).;?;The;company pays a 10 percent flotation cost whenever it issues new common stock (F;= 10%).;?;The;company?s target capital structure is 75 percent equity and 25 percent debt.;?;The;company?s tax rate is 40 percent.;?;The;company anticipates issuing new common stock during the upcoming year.;What;is the company?s WACC?;a. 10.67%;b. 11.22%;c. 11.47%;d. 12.02%;e. 12.56%;%.

 

Paper#51043 | Written in 18-Jul-2015

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