Question

Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.6 , the risk-free rate is 4 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 $30 per share, and has a growth rate of 5 percent. The firm's policy is to use a risk premium of 5 percentage points when using the bond-yield-plus-risk-premium method to find rs. The firm's marginal tax rate is 37 percent. What is Rollins cost of equity when using the DCF approach? Express your answer in percentage (without the % sign) and round it to two decimal places.

Answer #1

In order to use the discounted cash flow (DCF) method of calculating the cost of equity, we first identify the cash flow to the shareholders. Dividends are the only cash flow to the shareholders that accrue directly from the company.

In case of Rollins Corporation, the dividend is expected to grow at the rate of 5% each year constantly in perpeturity.

Hence we use the following formula as the base while finding the cost of equity for a constant growth firm:

where

P_{0} = Current Market Price of the company's stock

D_{0} = Last dividend

g = Constant growth rate of the firm

k_{e} = Cost of equity

Plugging in the values from the question in the formula above we get,

Transposing we get,

**Hence Cost of
equity using the DCF method is 12%.**

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
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Rollins Corporation is estimating its WACC. Its only
bond issue has a 6.07 percent annual yield to maturity, par value
of $1,000, mature in 20 years, and has a 5.2% coupon paid
semiannually (2.6%). There is $100 million total par
value of debt outstanding. The firm currently has a $100
par preferred stock that pays a 7.5 percent annual dividend and
currently yields 6 percent. Flotation costs of 5 percent
must be incurred on any new issue of preferred. Current...

Can you do in excel
Rollins Corporation is estimating its WACC. Its only
bond issue has a 6.07 percent annual yield to maturity, par value
of $1,000, mature in 20 years, and has a 5.2% coupon paid
semiannually (2.6%). There is $100 million total par
value of debt outstanding. The firm currently has a $100
par preferred stock that pays a 7.5 percent annual dividend and
currently yields 6 percent. Flotation costs of 5 percent
must be incurred on any new issue of preferred. Current...

can you use excel
Rollins Corporation is estimating its WACC. Its only
bond issue has a 6.07 percent annual yield to maturity, par value
of $1,000, mature in 20 years, and has a 5.2% coupon paid
semiannually (2.6%). There is $100 million total par
value of debt outstanding. The firm currently has a $100
par preferred stock that pays a 7.5 percent annual dividend and
currently yields 6 percent. Flotation costs of 5 percent
must be incurred on any new issue of preferred. Current
outstanding...

Can you use Excel
Rollins Corporation is estimating its WACC. Its only
bond issue has a 6.07 percent annual yield to maturity, par value
of $1,000, mature in 20 years, and has a 5.2% coupon paid
semiannually (2.6%). There is $100 million total par
value of debt outstanding. The firm currently has a $100
par preferred stock that pays a 7.5 percent annual dividend and
currently yields 6 percent. Flotation costs of 5 percent
must be incurred on any new issue of preferred. Current
outstanding...

can you use excel
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bond issue has a 6.07 percent annual yield to maturity, par value
of $1,000, mature in 20 years, and has a 5.2% coupon paid
semiannually (2.6%). There is $100 million total par
value of debt outstanding. The firm currently has a $100
par preferred stock that pays a 7.5 percent annual dividend and
currently yields 6 percent. Flotation costs of 5 percent
must be incurred on any new issue of preferred. Current
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