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Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The...

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Finance

Badger Corp. has an issue of 6% bonds outstanding with 6 monthsleft to maturity. The bonds are currently priced at $987.85, andpay interest semiannually. The firm's marginal tax rate is 40%. Theestimated risk premium between the company's stock and bond returnsis 6%. The firm's expects to maintain a capital structure with 40%debt and 60% equity going forward. The company's W.A.C.C. is ____%.Round your final answer to 2 decimal places (example:enter 12.34 for 12.34%), but do not round any intermediate workin the process.

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4.2 Ratings (789 Votes)

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =0.5
987.85 =? [(6*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^0.5
                   k=1
YTM% = 8.59

Cost of equity = YTM+premium over bond = 8.59+6 = 14.59%

Weight of equity = 1-D/A
Weight of equity = 1-0.4
W(E)=0.6
Weight of debt = D/A
Weight of debt = 0.4
W(D)=0.4
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 8.59*(1-0.4)
= 5.154
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=5.15*0.4+14.59*0.6
WACC =10.81%

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Transcribed Image Text

Badger Corp. has an issue of 6% bonds outstanding with 6 monthsleft to maturity. The bonds are currently priced at $987.85, andpay interest semiannually. The firm's marginal tax rate is 40%. Theestimated risk premium between the company's stock and bond returnsis 6%. The firm's expects to maintain a capital structure with 40%debt and 60% equity going forward. The company's W.A.C.C. is ____%.Round your final answer to 2 decimal places (example:enter 12.34 for 12.34%), but do not round any intermediate workin the process.

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