Weighted-Average Cost of Capital (WACC)
a. Micro Advantage, Inc., issued a $5,000,000, 20-year bond a year ago at 98 with a stated rate of 9 percent. Today, the bond is selling at 110. If the firm’s tax bracket is 30 percent, what is the current after-tax cost of this debt?
b. Micro Advantage, Inc., has $5,000,000 preferred stock outstanding that it sold for $24 per share. The preferred stock has a per share par value of $25 and pays a $3 dividend per year. The current market price is $30 per share. The firm’s tax bracket is 30 percent. What is the after-tax cost of the preferred stock?
c. In addition to the bonds and preferred stocks described in (a) and (b) above, Micro Advantage has outstanding 50,000 shares of common stock that has a par value of $10 per share and a current market price of $170 per share. The expected after-tax market return on the firm’s common equity is 20 percent. What is Micro Advantage’s weighted-average cost of capital (WACC)?
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