45.Refer to Rollins Corporation. What is Rollins' cost of retained earnings using the bond-yield-plus-risk-premium approach? a.13.6%b.14.1%c.16.0%d.16.6%e.16.9%
22 Chapter 11 The Cost of Capital ANS: CCost of retained earnings (Bond yield plus risk premium approach):ks= 12.0% + 4.0% = 16.0%. DIF: Easy OBJ: TYPE: Problem TOP: Cost of equity: Risk premium 46.Refer to Rollins Corporation. What is Rollins' lowest WACC? DIF: Easy OBJ: TYPE: Problem TOP: WACC 47.Refer to Rollins Corporation. What is Rollins' retained earnings break point? DIF: Easy OBJ: TYPE: Problem TOP: RE break point 48.Refer to Rollins Corporation. What is Rollins' WACC once it starts using new common stock financing? DIF: Easy OBJ: TYPE: Problem TOP: WACC above break point
Chapter 11 The Cost of CapitalJackson CompanyThe Jackson Company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10 percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate is 10 percent; and the expected return on the market is 14 percent. The firm's investment bankers believe that new issues of common stock would have a flotation cost equal to 5 percent of the current market price.49.Refer to Jackson Company. How much should an investor be willing to pay for this stock today? 23 a.$62.81b.$70.00c.$43.75d.$55.00e.$30.00ANS: Dks= 10% + 1.5(4%) = 16%. DIF: Easy OBJ: TYPE: Problem TOP: Prices of stock 50.Refer to Jackson Company. What will be Jackson's cost of new common stock if it issues new stock in the marketplace today? DIF: Easy OBJ: TYPE: Problem TOP: Cost of external equity J. Ross and Sons Inc.J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross expects to retain $15,000 in earnings over the next year. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year.51.Refer to J. Ross and Sons Inc. What is the firm's cost of retained earnings?
24 Chapter 11 The Cost of Capital DIF: Easy OBJ: TYPE: Problem TOP: Cost of retained earnings
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