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 $5,100,000 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 20%, what is the current after-tax cost of this debt?

2. Micro Advantage has $5,100,000 preferred stock outstanding that it sold for $22 per share. The preferred stock has a per share par value of $26 and pays a $5 dividend per year. The current market price is $32 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 60,000 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 15%. What is Micro Advantage’s weighted-average cost of capital (WACC)?

Answer 1