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Micro Spinoffs Inc.

Part A. Cost of Debt - Micro Spinoffs Inc., issued 20 year debt a year ago at coupon rate at 8 percent annually. Today the debt is selly at $1050.

If the firms tax bracket is 35%, what is the afer-tax cost of the debt?

Part B. Cost of Preferred Stock - Micro Spinoffs also has preferred stock that is outstanding. The stock pays a divident of $4 per share, the stock sells for $40.

What is the cost of the preferred stock?

Part C. Cost of Equity - Reliable Electricity is a regulated public utility, and is expected to provide steady growth of dividents of 5 percent per year for the indefinite future. It's last dividend was $5 a share; the stock sold for $60 a share just after the divident was paid.

What is the company's cost of equity?

Part D. Calculating WACC - Reactive Industries has the following capital structure. Its coporate tax is 35 percent.

What is its WACC?

Solution Preview

Part A. Cost of Debt - Micro Spinoffs Inc., issued 20 year debt a year ago at coupon rate at 8 percent annually. Today the debt is selling at $1050.

If the firms tax bracket is 35%, what is the after-tax cost of the debt?

where B is the issued price/current price
C is the coupon payment
r is the current interest rate
n is the period/year to maturity

n = 20 - 1 = 19

1050 = 80 x [1 ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the afer-tax cost of the debt.

$2.19