Question

Rollins Corporation is constructing its marginal cost of capital (MCC) schedule. Its target capital structure is 30 percent debt, 20 percent preferred stock, and 50 percent common equity. Its bonds have a 12 percent coupon rate of interest, semiannual interest payments, a current maturity of 20 years, and a market value equal to their par value of $1,000. The firm's marginal tax rate is 40 percent. What is Rollins' after-tax cost of debt?

Answer 1

Answer:

The After Tax Cost of Debt = 0.072 or 7.2%

Explanation:

The question is to determine the After Tax Cost of Debt for Rolling Stone.

This is carried out as follows

Step 1: When we decide to calculate the Yield to Maturity, it should be noted that Market Value = Par Value

Therefore,

Coupon Rate which is the same as the Yield to Maturity (YTM) = 12%

Step 2: Based on this derivative, therefore,

After Tax Cost of Debt = Yield TO Maturity Rate (1-Marginal Tax Rate)

= 12% (1-40%)

= 0.12 (1-0.4)

The After Tax Cost of Debt = 0.072 or 7.2%