Scenario 1: You thoroughly mix together two standard decks of 52 cards (so you have now a big deck of 104 cards). You randomly draw 2 cards from this big deck. What\'s the probability that the sum of the 2 cards is 7? Solution In each pack: # aces = 4 # 2s = 4 etc In two combined packs: # aces = 8 # 2s = 8 etc P(ace and 6) = P(ace) * P(6|ace) + P(6) * P(ace|6) = (8/104)*(8/103) + (8/104)*(8/103) = 128/10712 same story for P(2 and 5) and P(3 and 4) Note it doesn\'t matter which ace or six or whatever you pick add together: P(7 from two cards) = P(ace & 6) + P(2 & 5) + P(3 & 4) = 3 * 128/10712 = 384/10712 = 48/1339 and again... P(ace and 6) = P(ace first) * P(6 second) + P(6 first) * P(ace second) = (4/52)(4/52) + (4/52)(4/52) = 32/2704 ... and yet again the same story for P(2&5) and P(3&4) P(7 from two cards) = P(ace & 6) + P(2 & 5) + P(3 & 4) = 3 * 32/2704 = 96/2704 = 6/169.

1. SCENARIO 10-3Rollins Corporation has a target capital structure consisting of 20% debt, 20%
preferred stock, and 60% common equity. Assume the firm has insufficient retained earnings to
fund the equity portion of its capital budget. It has 20-year, 12% semiannual coupon bonds that
sell at their par value of $1,000. The firm could sell, at par, $100 preferred stock that pays a 12%
annual dividend, but flotation costs of 5% would be incurred. Rollins' beta is 1.2, the risk-free
rate is 10%, and the market risk premium is 5%. Rollins is a constant growth firm that just paid a
dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%. The firm's policy is to
use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find rs.
Flotation costs on new common stock total 10%, and the firm's marginal tax rate is 40%.
What is Rollins' WACC, if the firm has insufficient retained earnings to fund the equity portion
of its capital budget?
Solution
Cost of debt after tax = 12% * (1-0.4)
= 7.2%
cost of preferred stock = (12% *$100)/ { 100 - (5%*$100)}
= $12 / [100-5]
= 12.6%
Cost of common stock :
= 10 % + 1.2 * 5%
= 10% + 6%
= 16%
Note:- cost of common stock can also be calculated as:
$27 = $2 ( 1 + 0.08) / (required rate - 0.08)
$27 = $2.16 / (required rate - 0.08)
$27 * (required rate - 0.08) = $2.16
27 * required rate - 02.16 = 2.16
27 * required rate = 4.32
required rate = 4.32 /27
required rate = 16%
WACC
Weightage cost WACC
Common stock 0.60 16% 9.6%
preferred stock 0.20 12.6% 2.52%

2. Debt 0.20 7.2% 1.44%
13.56%