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**Use the following information for questions 1 through 4**

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.

**Question 1 (worth 15 out of 100 possible points for the quiz)**

Part a. Calculate the cost of** existing** debt.

Part b. Calculate the cost of **new** debt.

**Question 2 (worth 15 out of 100 possible points for the quiz)**

Part a. Calculate the cost of **existing** preferred stock.

Part b. Calculate the cost of **new** preferred stock.

**Question 3 (worth 15 out of 100 possible points for the quiz)**

Part a. Calculate the cost of **existing** common stock.

Part b. Calculate the cost of **new** common stock.

**=[(2.00*(1+0.08)/27(1-0.06)]+0.08=0.1651=16.51%)**

**Question 4 (worth 15 out of 100 possible points for the quiz)**

Part a. Calculate the weighted average cost of capital (WACC) for **existing** capital

Part b. Calculate the weighted average cost of capital (WACC) for **new** capital

**Question 5 (worth 15 out of 100 possible points for the quiz)**

Given that the company’s required return (WACC) is 10%, rank the two following projects:

Use only one best method to rank the projects

Project |
A |
B |

Project life |
12 years |
12 years |

Initial investment |
$1,200,000 |
$1,500,000 |

Annual operating cash flows |
$180,000 |
$225,000 |

**Question 6 (worth 25 out of 100 possible points for the quiz)**

Foley Systems is considering a new investment whose data are shown below. The equipment would be depreciated using the MCRS system basis over the project’s 4-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project’s life. Revenues and other operating costs are expected to be constant over the project’s life. **What is the project’s NPV? **

The accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.

WACC 10.0%

Net initial investment in fixed assets $75,000

Required new working capital $15,000

Sales revenues, each year $75,000

Operating costs (excluding depreciation), each year $25,000

Tax rate 35.0%

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