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Micro Spinoffs Inc.

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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?

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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
See Also This Related BrainMass Solution

Cost of Equity and WACC for Micro Spinoffs, Inc.

Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 8 percent, paid annually. Today, the debt is selling at $1,050. The firm's tax bracket is 35 percent.

Micro Spinoffs also has preferred stock outstanding. The stock pays a dividend of $4 per share, and the stock sells for $40.

Suppose Micro Spinoffs's cost of equity is 12.0 percent. What is its WACC if equity is 50 percent, preferred stock is 20 percent, and debt is 30 percent of total capital?

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