Reference no: EM133137957

Question 1 - Rollins Corporation is estimating its WACC. Its target capital structure is 40% debt and 60% common equity. Its bonds have par value of $1,000, a 8% coupon, paid semi-annually, a current maturity of 7 years, and sell for $901.04. Rollins' beta is 1.5, the risk-free rate is 9%, and the market risk premium is 6%. Rollin is currently selling for $25 a share. The firm's marginal tax rate is 40%.

a. What is Rollins' WACC?

b. Discuss the problems of estimating the cost of capital for privately owned firms.

Question 2 - Jack's Construction Co. has 80,000 bonds outstanding that are selling at par value ($1,000). Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4% and the market risk premium is 8%. Jack's tax rate is 35%. What is Jack's cost of equity and its weighted average cost of capital?

Question 3 - Och, Inc., is considering a new project that will result in initial after-tax cash savings of $3.5 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefinitely. The firm has a target debt-to-equity ratio of 0.55, a cost of equity of 13 percent,, and an after-tax cost of debt of 5.5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes and management applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Under what circumstance should Och take on the project?