Rollins Corporation Is Constructing Its Marginal Cost of Capital (MCC)

question 52

Multiple Choice

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?

• A)8.4%
• B)7.2%
• C)4.8%
• D)12.0%
• E)3.6%

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Definitions:

Explicit Costs

Dollar costs incurred by business firms, such as wages, rent, and interest.

Implicit Costs

The opportunity costs that are not directly incurred but represent the loss of alternative benefits when choosing one option over another.

Explicit Costs

Direct, out-of-pocket payments for goods and services required to run a business.

Accounting Profit

Sales minus explicit cost. Implicit costs are not considered.