Question: 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.
Given that the company's required return (WACC) is 10%, rank the two following projects:
Use only one best method to rank the projects
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Project
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A
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B
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Project life
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12 years
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12 years
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Initial investment
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$1,200,000
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$1,500,000
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|
Annual operating cash flows
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$180,000
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$225,000
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