BUS 530 Test Number 2

Instructions:

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2. Attempt all the parts on the assignment.

3.

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4.

A grade of zero will be assigned to all essay questions without a proper citation for all sources of information.

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Useful Formulae BUS 530

Use the following information for problems 1 through 8

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.

Part 1

Calculate the cost of existing

debt.

Part 2

Calculate the cost of

new

debt.

Part 3

Calculate the cost of

existing

preferred stock.

Part 4

Calculate the cost of

new

preferred stock.

Part 5

Calculate the cost of

existing

common stock.

Part 6

Calculate the cost of

new

common stock.

Part 7

Calculate the weighted average cost of capital (WACC) for

existing

capital

Part 8

Calculate the weighted average cost of capital (WACC) for

new

capital

Use the following information for problems 9 and 10

Our

WACC is 10%

and the table below shows the forecasted free cash flows.

Year

1

2

3

Free cash flows

$2,000,000

$4,000,000

Constant growth rate of free cash flows starts at 4%

Part 9

Calculate the horizon value of operations at year 2 (HV2)

Part 10

The company has $6,500,000 in debt. What will the price of the stock be if the company is planning an IPO by issuing 5,000,000 shares?