BUS 630 Quiz number 3 Student name: Instructions: 1. Provide your...

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BUS 630 Quiz number 3 Student name: Instructions: 1. Provide your answers in a Word file so I can provide you with a graded file 2. Attempt all question 3. Show all work so I can give you partial...

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BUS 630 Quiz number 3

Student name:

Instructions:

1. Provide your answers in a Word file so I can provide you with a graded file

2. Attempt all question

3. Show all work so I can give you partial credit if the final answer is not correct

4. The completed test is due by midnight Sunday PST

Use the following information for questions 1 through 4

Rollins Corporation is estimating its WACC. It’s current and target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon rate, paid semiannually, a current maturity of 20 years, and sell for $1,040. The firm could sell, at par, $100 preferred stock which pays a $12.00 annual preferred dividend. Rollins' common stock beta is 1.2, and the risk-free rate is 10 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00. Its stock sells for $27.00 per share, and has a growth rate of 3 percent. The floatation cost is 5% for debt, 10% for preferred stock, and 25% for common stock. The firm's marginal tax rate is 40 percent.

Question 1 (worth 15 out of 100 possible points for the quiz)

Part a. Calculate the cost of existing debt.

Part b. Calculate the cost of new debt.

Question 2 (worth 15 out of 100 possible points for the quiz)

Part a. Calculate the cost of existing preferred stock.

Part b. Calculate the cost of new preferred stock.

Question 3 (worth 15 out of 100 possible points for the quiz)

Part a. Calculate the cost of existing common stock.

Part b. Calculate the cost of new common stock.

Question 4 (worth 15 out of 100 possible points for the quiz)

Part a. Calculate the weighted average cost of capital (WACC) for existing capital

Part b. Calculate the weighted average cost of capital (WACC) for new capital

Question 5 (worth 15 out of 100 possible points for the quiz)

Given that the company’s required return (WACC) is 10%, rank the two following projects:

Use only one best method to rank the projects

Project	A	B
Project life	12 years	12 years
Initial investment	$1,200,000	$1,500,000
Annual operating cash flows	$180,000	$225,000

Question 6 (worth 25 out of 100 possible points for the quiz)

Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated using the MCRS system basis over the project’s 4-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project’s life. Revenues and other operating costs are expected to be constant over the project’s life. What is the project’s NPV?

The accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.

WACC 10.0%

Net initial investment in fixed assets $75,000

Required new working capital $15,000

Sales revenues, each year $75,000

Operating costs (excluding depreciation), each year $25,000

Tax rate 35.0%

bus-630-quiz-number-3-10ejowy2.docx

Answered 1 days After Feb 10, 2021

Jyoti · Accepted Answer

BUS 630 Quiz number s3
Solution to Question 1
Rollins Corporation’s bonds have 12% coupon rate with maturity period of 20 years. Selling price is $1040. Interest is paid twice a year. Its weightage is 20% in capital structure. Flotation cost is 5% for debt and growth rate is 3%. Marginal tax rate is 40%.
Assumption : Par value of bond is $1000.
Cost of debt is represented by Kd
(a) Cost of existing debt 
Kd (before tax) = Interest
                        =12%
Kd (after tax) = Interest (1-t)
   =12% (1-0.40)
  = 7.2%
(b) Cost of new debt
Kd (before tax) = Interest/ Market price (1-Flotation cost) + growth rate
                      = 120/1040(1-0.05) + 3%
                     =15.14%
Kd (after tax) = Interest (1-t)/ Market price (1-Flotation cost) +growth rate
                       =120 (1-0.40)/1040(1-0.05) +3%
                      = 10.28%
Solution to Question 2
Rollins Corporation pays a $12.00 annual preferred dividend.  It can sell, at par, $100 preferred stock. Flotation cost is 10% and growth rate is 3%
Cost of preferred stock is represented by Kp
(a) Cost of existing preferred stock
Kp = D/P(1-flotation cost)
     = 12/100(1-0.05)
     = 12.63%
(b) Cost of new preferred stock
Kp =D/P (1-flotation cost) + g
      =$12/$100(1-0.05) +3
      =15.63%
Solution to Question 3
Rollins Corporation pays dividend of $2. It has common stock beta of 1.2.  Risk-free rate of return is 10 percent. The stock can be sold for $27.00 each. Growth rate of 3 percent. Flotation cost is 25% for common stock
Assumption:

BUS 630 Quiz number 3 Student name: Instructions: 1. Provide your answers in a Word file so I can provide you with a graded file 2. Attempt all question 3. Show all work so I can give you partial...

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