Microdrive has 50 million shares of stock and the price is $35.44 per share.

MicroDrive pays 7.5% interest on their short term debt. MicroDrives previous tax rate was 25% but they expect that in the future the tax rate will be 23.1%.

The CFO says that the last time they issued bonds, the cost was 6.7%. They have some existing 20 year bonds that have a coupon rate of 6.5%, are non-callable and pay semi-annual payments. These cost $1,129. They also have some 5 years bonds that have a coupon rate of 4.8%, are non-callable and pay semi-annual payments. These cost $1,176. And they have some 20 year bonds that have a coupon rate of 6.6%, that are callable and pay semi-annual payments. These cost $1,145.

They have preferred stock that has a par value of $100. The dividend rate is 7.2% and the cost is $125.76 per share. The flotation cost of the preferred stock is 2.7%.

MicroDrives stock pays an annual dividend of $1.50 which is expected to grow at a constant rate of 2.6% a year. The stock has a Beta of 1.1. The market risk premium is 5.7% and the risk free rate is .25% (that is one quarter of one percent). MicroDrives management considers their stock to have a risk premium above their bonds of 2.0%.

1. What is MicroDrive's 2021 capital structure based on book values?

   	A.	15.2% long term debt, 3.3% short term debt, 4.6% preferred stock and 76.9% common equity
   	B.	20.2% long term debt, 6.1% short term debt, 4.7% preferred stock and 69% common equity
   	C.	18.6% long term debt, 5.2% short term debt, 3% preferred stock and 73.2% common equity
   	D.	26.5% long term debt, 1.8% short term debt, 4.4% preferred stock and 67.3% common equity

2. What is MicroDrive's 2021 capital structure based on market values?

   	A.	15.4% long term debt, 3.5% short term debt, 3.6% preferred stock and 77.5% common equity
   	B.	23.2% long term debt, 6.6% short term debt, 3.7% preferred stock and 66.4% common equity
   	C.	18.8% long term debt, 5.2% short term debt, 3.2% preferred stock and 72.8% common equity
   	D.	26.5% long term debt, 1.8% short term debt, 4.4% preferred stock and 67.3% common equity

2021 $100 10 500 1,000 $1,610 2,000 $3,610 MicroDrive's Most Recent Financial Statements (Millions, Except for Per Share Data) INCOME STATEMENTS BALANCE SHEETS 2020 2021 Assets 2020 Net sales $4,800 $5,000 Cash $102 COGS (excl. depr.) 3,710 3,900 ST Investments 40 Depreciation 180 200 Accounts 384 receivable Other operating 470 500 Inventories 774 expenses EBIT $440 $400 Total $1,300 CA Interest expense 40 60 Net 1,780 PP&E Pre-tax earnings $400 $340 Total assets $3,080 Taxes (25%) 100 85 NI before pref. div. $300 $255 Liabilities and equity Preferred div. 7 Accounts payable $180 7 Net income $293 $248 Notes payable 33 Accrual 370 S Other Data Total CL $583 Common dividends $59.4 $60.0 Long-term bonds 450 Addition to RE $233.6 $188.0 Total liabilities $1,033 Tax rate 25% 25% Preferred stock 100 Shares of common stock 60 60 Common stock 550 Earnings per share $4.88 $4.13 Retained earnings 1,552 Dividends per share $0.99 $1.00 Total common $2,102 equity Price per share $45.00 $31.00 Total liabs. & $3,235 equity $210 175 425 $810 620 $1,430 100 550 1,889 $2,439 $3,969 2021 $100 10 500 1,000 $1,610 2,000 $3,610 MicroDrive's Most Recent Financial Statements (Millions, Except for Per Share Data) INCOME STATEMENTS BALANCE SHEETS 2020 2021 Assets 2020 Net sales $4,800 $5,000 Cash $102 COGS (excl. depr.) 3,710 3,900 ST Investments 40 Depreciation 180 200 Accounts 384 receivable Other operating 470 500 Inventories 774 expenses EBIT $440 $400 Total $1,300 CA Interest expense 40 60 Net 1,780 PP&E Pre-tax earnings $400 $340 Total assets $3,080 Taxes (25%) 100 85 NI before pref. div. $300 $255 Liabilities and equity Preferred div. 7 Accounts payable $180 7 Net income $293 $248 Notes payable 33 Accrual 370 S Other Data Total CL $583 Common dividends $59.4 $60.0 Long-term bonds 450 Addition to RE $233.6 $188.0 Total liabilities $1,033 Tax rate 25% 25% Preferred stock 100 Shares of common stock 60 60 Common stock 550 Earnings per share $4.88 $4.13 Retained earnings 1,552 Dividends per share $0.99 $1.00 Total common $2,102 equity Price per share $45.00 $31.00 Total liabs. & $3,235 equity $210 175 425 $810 620 $1,430 100 550 1,889 $2,439 $3,969