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 $5,500,000 par value, 16-year bond a year ago at 95 (i.e., 95% of par value) with a stated rate of 8%. Today, the bond is selling at 105 (i.e., 105% of par value). If the firm’s tax bracket is 30%, what is the current after-tax cost of this debt?

2. Micro Advantage has $5,500,000 preferred stock outstanding that it sold for $22 per share. The preferred stock has a per share par value of $25 and pays a $5 dividend per year. The current market price is $27 per share. The firm’s tax bracket is 31%. 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 63,000 shares of common stock outstanding that has a par value of $10 per share and a current market price of $180 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)?

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 $5,500,000 par value, 16-year bond a year ago at 95 (ie., 95% of par value) with a stated rate of 8% Today, the bond is selling at 105 (i.e., 105% of par value). If the firm's tax bracket is 30%, what is the current after-tax cost of this debt? 2. Micro Advantage has $5,500,000 preferred stock outstanding that it sold for $22 per share. The preferred stock has a per share par value of $25 and pays a $5 dividend per year. The current market price is $27 per share. The firm's tax bracket is 31%. 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 63,000 shares of common stock outstanding that has a par value of $10 per share and a current market price of $180 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)? Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 In addition to the bonds and preferred stock described in requirements 1 and 2, Micro Advantage has 63,000 shares of common stock outstanding that has a par value of $10 per share and a current market price of $180 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)? (Round "Interest or Dividend Rate", "After-tax Rate or Expected Return" and "Cost of Capital Components" to 2 decimal places (ie. .1234 = 12.34%), "Weights" to 3 decimal places, and other answers to the nearest whole dollar amount.) Show less Book Value Current Market Weights Cost of Capital Components Interest or Dividend Rate 8.00 % 17.39 % After-tax Rate or Expected Return 5.33 % 18.52 % Bond Preferred Stock $ 5,775,000 $ $ $ $ 5,500,000 5,500,000 630,000 11,630,000 Common 0.00 % 21.00 % Stock Total $ 5,775,000 0.000 0.00 % < Required 2 Required 3 >

Answer 1

The completed table along with the formulas are shown below (the formula view table would help you understand how to carry out he calculations)

Cost of Capital Components Book Value Interest or Dividend Rate After tax rate Current Market Value Weights 5500000 5775000 Bond 8% 5.33% 0.242 1.29% Preferred Stock 6750000 11340000 20% 5.24% 5500000 18.52% 0.283 9.98% Common Stock 0.475 630000 0 21% Total 16.51% 23865000 11630000

2 Book Value Cost of Capital Components Interest or Dividend Rate 0,08 After tax rate Current Market Value Weights 5500000 0,0533 5775000 -G3$G$6 3 Bond - H3 " F3 5500000 =(550000022) 27 -G4$G$6 H4" F4 H5~F5 -SUM (13:15) -525 0.1852 Preferred Stock 4 0.21 -G5$G$ 6 0 -63000 180 Common Stock 630000 5 6 -SUMIG3:G5 ) Total - SUM(D3 : D5 ) 7 8 9