Student name: Christina Cao Use the following information for questions 1, 2, an
ID: 2784763 • Letter: S
Question
Student name: Christina Cao Use the following information for questions 1, 2, and 3. Rollins Corporation is estimating its WACC. It's current and target capital structure is 40 percent debt and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for S1,040. Rollins' 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 8 percent. The irm's marginal tax rate is 40 percent. T ow all work for credit stion 1) is Rollins 'cost of debt (also known as YTM, rd. or ka)? -40; PV=-1040; PMT-60; FV= 1000 I= 5.74% -k d/2 x 2=11.5% 1.5% (0.6) = 6.9%Explanation / Answer
The Cost of Debt in this scenario can be calculated with 2 different values. In Retrospect the cost can be calculated with the amount of money that the company had raised previously, which will be the par value of their bonds. Prospectively however, they can raise $1,040 from each bond paying the same amount of interest.
Now we have the coupon on these bonds to be 12%. Then the Cost of Debt can be given by the following expression:
:Coupon(1-tax rate)/Par value or Market Value.
: 120 (1-0.4)/$1,040,
: 72/$1,040, or
: 6.9%
Hope this helps! :)