29 Jun Question Multiple Choice Questi
Question
Multiple Choice Questions
Use the following information to answer 1-6. Rollins Corporation is examining its cost of capital. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 10 percent coupon, paid semiannually, a current maturity of 20 years, a par value of $1,000, and sell for $849.54. The firm could sell at par, $100 preferred stock, which pays a 12 percent annual dividend, but floatation cost 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 just paid a dividend of $2.00, sells for $27.00 per share, and has a constant growth rate of 8 percent. The firms’ policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find Ra. 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. What is Rollins’ before-tax cost of debt?
a) 6% b) 8% c) 10% d)12% e)20%
2. What is the firms cost of preferred stock?
a) 12% b) 12.63% c) 13% d) 14.21% e) 15.48%
3. What is Rollins’ cost of retained earnings using the CAPM approach?
a) 14% b) 15% c) 16% d) 17% e)18%
4. What is firms’ cost of retained earnings using the DCF approach?
a) 16% b)15.82% c) 15.41% d) 15% e) 14.87%
5. What is firms’ cost of retained earnings using the bond-yield-plus-risk-premium approach?
a) 12% b) 13% c) 14% d) 15% e) 16%
6. Estimate Rollins’ RACC when retained earnings are used as the equity component.
a) 12.23% b) 12.56% c) 13.21% d) 13.34% e) 13.57%
——
Use the following information to answer 7-9. Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity. The risk-free rate is 6 percent and the market risk premium is 5 percent. Currently, the company’s cost of equity is 12 percent and its tax rate is 40 percent.
7. What is the unlevered cost of equity?
a) 11.22% b) 11.44% c) 11.66% d) 11.88% e) 12%
8. What is the levered beta if the company were to change its capital structure to 50 percent debt and 50 percent equity?
a) 1.2 b) 1.45 c) 1.54 d) 1.67 e) 1.81
9. What would be Simon’s levered cost of equity with the new capital structure (50 percent debt and 50 percent equity)?
a) 12% b) 13.41 c) 14.35 d) 15.24 e) 16%
—-
Use the following information to answer 10-11. The A.J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000 and it is a zero-growth company. AJC’s cost of equity is 10 percent, and the tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding. (10 points)
10. What is AJC’s current total market value?
a) $728,000 b) $628,000 c) $528,000 d) $428,000 e) $328,000
11. What is AJC’s current stock price?
a) $32.8 b) $42.8 c) $52.8 d) $62.8 e) $72.8
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.