Question

Check my work Below is information regarding the capital structure of Micro Advantage Inc. On the basis of this information you are asked to respond to the following three questions: 0.25 points eBook Required: 1. Micro Advantage issued a $5,650,000 par value, 19-year bond a year ago at 96 (i.e., 96% of par value) with a stated rate of 10%. Today, the bond is selling at 115 (i.e., 115% of par value). If the firm's tax bracket is 35%, what is the current after-tax cost of this debt? 2. Micro Advantage has $5,650,000 preferred stock outstanding that it sold for $23 per share. The preferred stock has a per share par value of $23 and pays a $4 dividend per year. The current market price is $25 per share. The firm's tax bracket is 28%. What is the after-tax cost of the preferred stock? 3. In addition to the bonds and preferred stock described in requirements 1 and 2, Micro Advantage has 78,000 shares of common stock outstanding that has a par value of $10 per share and a current market price of $160 per share. The expected after-tax market return on the firm's common equity is 21%. What is Micro Advantage's weighted-average cost of capital (WACC)? References

Answer 1

A B C D E 1 Requirement #1 Issue price 4 $96 Interest rate 5 10% Coupon payment issue price x interest rate 6 -96x10% $9.6 Current market price $115 10 Tax rate 35% or 0.35 11 Current after tax cost (Coupon payment current market price) x(1-tax rate) ($9.6/115) (1-0.35) 12 13 5.43% 14 15 16 Requirement #2 17 18 After tax cost of Pr. Stock (Dividend /Current market price) x 100 19 20 (4/25)*100 21 16% LLUI 23 L CO N

Н J К М 28 26 27 Requirement # 3 28 Cost of Current market value Book value Interest or dividend rate After tax cost Items Weight 29 capital components Bond $5,650,000 $6,497,500 30 9.6% 5.43% 0.259 1.404 Pr. Stock $5,650,000 $6,141,304 3.912 31 16% 16% 0.244 Common stock $780,000 NA $12.480,000 32 21% 0.497 10.434 Total 15.75% $25,118,804 33 34 Market value of Pr. Stock (5650000/23) *25 35 $6,141,304 36 37 Market value of common stock =78000x160 38 $12,480,000 39 40 Market value of bond =(5650000/100)* 115 41 $6,497,500 42 43

Н J К L М 26 27 Requirement #3 28 Cost of capital components Current market Interest or dividend rat Book value After tax cost Items Weight 29 value Bond L30/L33 B14 H42 К30'МЗ0*100 30 $5,650,000 9.6% Pr. Stock L31/L33 Н36 К31"М31*100 31 $5,650,000 16% 16% Common stock NA Н39 L32/L33 К32"М32"100 32 $780,000 21% Total L30+L31HL32 33 15.75% 34 Market value of Pr. Stock (5650000/23) *25 35 $6,141,304 36 37 Market value of common stock 78000x160 38 $12,480,000 39 40 Market value of bond (5650000/100) 115 41 $6,497,500 42 43
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