Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rate is 40 percent. Which of the following is Rollins' component cost of debt? (Round off the answer to one decimal place.)
A) 8.4 percent
B) 7.2 percent
C) 6.8 percent
D) 5.3 percent
E) 9.5 percent

Question

Quizplus · Accepted Answer

The component cost of debt can be calculated using the formula: 
Cost of Debt = (Coupon Rate) x (1 - Tax Rate)
Cost of Debt = 12% x (1 - 0.4) = 7.2%.
Therefore, the correct answer is B, 7.2 percent.

Rollins Corporation Is Constructing Its MCC Schedule