Rollins Corporation is constructing its MCC schedule. 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 incurred. Rollins' beta is 1.2, the risk-free rate is 10 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 $27.00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find k(s) (component cost of retained earnings). 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. What is Rollins' cost of preferred stock?
Click on the arrows to vote for the correct answer
A. B. C. D. E.A
K(ps) (cost of preferred stock) = $12/$100 (0.95) = 12.6%.
To calculate the cost of preferred stock for Rollins Corporation, we need to consider the annual dividend payment, the flotation costs, and the stock price.
Calculate the annual dividend payment: The preferred stock pays a 12 percent annual dividend. Since the stock is selling at par value of $100, the annual dividend payment can be calculated as: Annual Dividend = Preferred Stock Price * Dividend Rate Annual Dividend = $100 * 12% = $12
Calculate the flotation costs: Flotation costs of 5 percent would be incurred for issuing the preferred stock. Since the stock is selling at par value of $100, the flotation costs can be calculated as: Flotation Costs = Preferred Stock Price * Flotation Cost Rate Flotation Costs = $100 * 5% = $5
Adjust the dividend payment for flotation costs: Adjusted Annual Dividend = Annual Dividend - Flotation Costs Adjusted Annual Dividend = $12 - $5 = $7
Calculate the cost of preferred stock: The cost of preferred stock is the adjusted annual dividend divided by the preferred stock price, expressed as a percentage. Cost of Preferred Stock = (Adjusted Annual Dividend / Preferred Stock Price) * 100 Cost of Preferred Stock = ($7 / $100) * 100 = 7%
Therefore, the cost of preferred stock for Rollins Corporation is 7%.
None of the provided answer options matches the calculated result. It's possible that there may be an error in the question or answer choices.