Micro Spinoffs, Inc., issued 10-year debt a year ago at par value with a coupon
ID: 2753145 • Letter: M
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.)
THE ANSWER IS 7.76 !!! How do I get that answer?! Im so stuck... Thank you in advance
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.)
THE ANSWER IS 7.76 !!! How do I get that answer?! Im so stuck... Thank you in advance
Explanation / Answer
Solution:
Working
1.Cost of Debt = 5 % * ( 1- 20 % ) = 4%
2. Cost of Equity = Dividend / Current price * 100 = $ 5 / $ 50 * 100 = 10 %
WACCC Weights Cost of Capital Debt 40% 4% 1.60% Preferred Stock 10% 10% 1.00% Common Stock 50% 12% 6.00% WACC 8.60%