Cost of capital Assignment | Top Essay Writing

Prompt: First, review the module resources, especially Chapter 11 in the textbook ( final Reporting, Financial statement Analysis and valuation 9th edition). Then, address the following:  Answer the following questions based on your organization chosen for the final project. Write your response in a separate Microsoft Word document: o Importance of Cost of Capital: Why is cost of capital important to an organization, and what does it measure? o Meaning of Calculations: How do organizations calculate various costs, and what do these calculations mean to business?  After completing the written portion, calculate answers to the problems in the worksheet.

Activity Worksheet

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Prompt: After reviewing the data in the problem, respond to the problems below. Indicate the answer you believe is correct.

 

 

Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60% common equity.  Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000.  The firm could sell, at par, $100 preferred stock that pays a 12% annual dividend, but flotation costs of 5% would be incurred.  Rollins’ beta is 1.2, the risk-free rate is 10%, and the market risk premium is 5%. 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%.  The firm’s policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find rs.  Flotation costs on new common stock total 10%, and the firm’s marginal tax rate is 40%.

 

Cost of debt                                                                                                                                      

  1. What is Rollins’ component cost of debt?

 

  1. 0%
  2. 1%
  3. 6%
  4. 0%
  5. 2%

 

                                                                                                                                               

  1. What is Rollins’ cost of preferred stock?

 

  1. 0%
  2. 0%
  3. 0%
  4. 6%
  5. 2%

 

                                                                                                                                               

  1. What is Rollins’ cost of retained earnings using the CAPM approach?

 

  1. 6%
  2. 1%
  3. 0%
  4. 6%
  5. 9%

 

                                                                                                                                               

  1. What is the firm’s cost of retained earnings using the DCF approach?

 

  1. 6%
  2. 1%
  3. 0%

 

 

  1. What is Rollins’ cost of retained earnings using the bond-yield-plus-risk-premium approach?

 

  1. 6%
  2. 1%
  3. 0%
  4. 6%
  5. 9%

 

                                                                                                                                               

  1. What is Rollins’ WACC, if the firm has insufficient retained earnings to fund the equity portion of its capital budget?

 

  1. 6%
  2. 1%
  3. 0%
  4. 6%
  5. 9%

 

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