Question

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: Required: 1. Micro Advantage issued a $5,950,000 par value, 19-year bond a year ago at 96 (i.e., 96% of par value) with a stated rate of 7%. Today, the bond is selling at 110 i.e., 110% of par value). If the firm's tax bracket is 40%, what is the current after-tax cost of this debt? 2. Micro Advantage has $5,950,000 preferred stock outstanding that it sold for $25 per share. The preferred stock has a per share par value of $22 and pays a $2 dividend per year. The current market price is $26 per share. The firm's tax bracket is 29%. 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 71,000 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 16%. What is Micro Advantage's weighted average cost of capital (WACC)? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Micro Advantage issued a $5,950,000 par value, 19-year bond a year ago at 96 (i.e., 96% of par value) with a stated rate of 7%. Today, the bond is selling at 110 (ie., 110% of par value). If the firm's tax bracket is 40%, what is the current after-tax cost of this debt? (Round your answer to 2 decimal places. (i.e. 1234 = 12.34%)) Current after-tax cost of this debt Rocuired. 2

Answer 1

Answer: 1. Given that Boned payment. $5950,000 Matining period = 19 years Issued price = $96 Interest price - Zjf Current price = $110 coupon payment = $96*7% & $6.72 cupon payment &7 * *6.79 Tax rate = 40% current after tax cost of debt coupon payments (1-Tes: current price = $7/310 * (-40%) = $7/3110 x0.6 : 0.0382 .: Current after tax cost of debt = 3.82% 2) Sierpiented share amount: $5950,000 Dividends per year = $2 Total sale care Afer Tax cost of preferred stock 20 Dividends per year exareutor X100 = Peg 4100 After tax cost of preferred stock = 7.69% Book Interest After ratelor current igla cost 4 capital value Dividend Expectedrek Harket value components Boud prefent 45950,000 7% | 3.82% $ 7,810,000 0.298 "187. 1671,000x110) В.sexo9487 stock $5,950.000 7.69% 7.69% $7034818 10.268 2.06% $5.950,00% 19.69 +0.868] 263 Commquale $5.950,000 na 1 16% $11.360,000|0.434 694% [1,000x316 16x0.434] *26,201818 1.000 10.14%. weights = current marketvalen I tolal Cavarent market value.