of the

CFA EXAM
Level 1

Study Session :

Corporate Finance

Introduction by the Author : Hi there, CFA fellows, here you are . You see , it doesn’t need to be an expensive prep course to get first class preparation for the CFA exams. The following questions are original CFA AIMR questions and not just composed by prep course providers. They all come with a clear answer. In order to understand why the questions are commented by “answer is correct / incorrect” it is important to know that all questions have automatically been responded with the first (and only the first ) answer. Your CFA-Aficionado cfa-aficionado@cfa-aficionado.cjb.net cfa-aficionado@cfa-aficionado.biz14.com cfa-aficionado@softhome.net

And now here we go :

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? * 12.6% * 13.2% * 11.0% * 12.0% * 10.0%

That answer is correct! K(ps) (cost of preferred stock) =... [continues]

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