Micro Spinoffs, Inc., issued 10-year debt a year ago at par value with a coupon

Question

Micro Spinoffs, Inc., issued 10-year debt a year ago at par value with a coupon rate of 5%, paid annually. Today, the debt is selling at $1,210. The firm’s tax bracket is 20%. Micro Spinoffs also has preferred stock outstanding. The stock pays a dividend of $5 per share, and the stock sells for $50. Micro Spinoffs’s cost of equity is 12%. What is its WACC if equity is 50%, preferred stock is 10%, and debt is 40% of total capital? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

LET PAR VALUE FOR DEBT IS $1000

AND PAR VALUE FOR PREFERRED STOCK IS $10

R.V - REDEEMABLE VALUE

N.P - NET PROCEEDS

n - LIFE

COST OF DEBT = ANNUAL INTEREST (1 - TAX RATE) + R.V - NP/n

R.V + N.P/ 2

= 50(1-0.20) + 1210-1000/10

   1210 + 1000/2

= 40 + 21 / 1105 * 100

= 5.52%

COST OF PREFERRED STOCK = ANNUAL DIVIDEND + R.V-N.P/n

   R.V + N.P/2

= 5 +( 50 - 10/20) (let preferred stock reddemable in 20 years)

   50+10/2

= 7/30 * 100

= 23.33%

   CALCULATION OF WACC   

PARTICULARS WEIGHTS COST WEIGHTED COST

DEBT 0.4 5.52 2.21

PREFERRED STOCK 0.1 23.33 2.33

EQUITY 0.5 12 6

   WACC 10.54%

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.