Answered: Micro | bartleby

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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)?

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