Question

Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 8.5 percent coupon, paid semiannually, a current maturity of 20 years, and sell for the par value, $1,000. The firm's marginal tax rate is 39 percent.What is Rollins' component after-tax cost of debt?

Answer 1

The component after-tax cost of debt for Rollins Corporation can be calculated using the formula: After-tax cost of debt = Pre-tax cost of debt × (1 - Tax rate). Given that the bonds have an 8.5% coupon rate and a current maturity of 20 years, the pre-tax cost of debt is 8.5%. Since the firm's marginal tax rate is 39%, the after-tax cost of debt would be 5.165%

Step-by-step explanation:

The component after-tax cost of debt for Rollins Corporation can be calculated using the formula:

After-tax cost of debt = Pre-tax cost of debt × (1 - Tax rate)

Given that the bonds have an 8.5% coupon rate and a current maturity of 20 years, the pre-tax cost of debt is 8.5%. Since the firm's marginal tax rate is 39%, the after-tax cost of debt would be:

After-tax cost of debt = 8.5% × (1 - 0.39) = 5.165%

Given that the bonds have an 8.5% coupon rate and a current maturity of 20 years, the pre-tax cost of debt is 8.5%. Since the firm's marginal tax rate is 39%, the after-tax cost of debt would be 5.165%