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 $5,700,000 par value, 18-year bond a year ago at 97 (i.e., 97% 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 40%, what is the current after-tax cost of this debt? 2. Micro Advantage has $5,700,000 preferred stock outstanding that it sold for $22 per share. The preferred stock has a per share par value of $22 and pays a $5 dividend per year. The current market price is $30 per share. The firm's tax bracket is 27%. 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 83,000 shares of common stock outstanding that has a par value of $10 per share and a current market price of $150 per share. The expected after-tax market return on the firm's common equity is 20%. What is Micro Advantage's weighted-average cost of capital (WACC)?

Answer 1

Solution : 1) Data provided Band . Por Vale(D. $ 5700,000 Net Poceed (P) = $ 5700000 X 97% 5529000 No. of yoors to maturity 18 yours Annual Internet Payment (c) = 5700 000 X 8% = $ 456,000 Market value = 5700000 x 105% = 5985000 Tax Rate = 8t 40% Cost of debt (ka) before Paw C+ (O-P) (off) = 456000 + [5700000 – 5529000 DAP 2 18 100 5700 000 + 5529000 2 = (456000 + 9500) x 100 = 5614 500 8.29% I cost of debt after tax = = Kox(1-lax rate; 8.29X (1-0.4) : 4.97 % Scanned with CamScanner

per shere Solution : Por Value cond Current Tam of Pref. stock = 822 per year. 35 orket Price : d 30 = 27% After too lost of Prof. stock = Dividend 1 Net Porcood per share 5 x 100 = 16.67'!, 30 30 is Notes: No adjustment - dividends are made for paid after taxes because tax. Common 1. shares : No. of Phares = 83,000 . Por value = 8 10 per share - CMP = $150 per share Expected return after ton = 20% Weighted average = { (re) + f ((p) + D_(ra) (1-tax) where, E = Morket value of Equity Pref. Stock D. UT U Deble V : E+P+D re = cost of Equity - re = cost of P. stuck e cost of debt after tax Spinned with

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