Below is information regarding the capital structure of Micro Advantage Inc. On

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 $5,350,000 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 20%, what is the current after-tax cost of this debt?

2. Micro Advantage has $5,350,000 preferred stock outstanding that it sold for $25 per share. The preferred stock has a per share par value of $26 and pays a $2 dividend per year. The current market price is $30 per share. The firm’s tax bracket is 28%. 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 85,000 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 18%. What is Micro Advantage’s weighted-average cost of capital (WACC)?

Explanation / Answer

1. FV = 1000, PV = -1100, PMT = 70, N = 18

use rate function in Excel and multiply by 1-0.20

after tax cost = 4.8572%

2. cpst pf preferred stock = 2/30 = 6.6667%

3.

WACC = 12.26%

Amount weight cost weight*cost equity             13,600,000.00 0.5300 18.0000% 0.0954 debt               5,885,000.00 0.2294 4.8572% 0.0111 preferred shares               6,173,076.92 0.2406 6.6667% 0.0160

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