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

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Badger Corp. has an issue of 6% bonds outstanding with 6 monthsleft to maturity. The bonds are currently priced at $998.89, andpay interest semiannually. The firm's marginal tax rate is 40%. Theestimated risk premium between the company's stock and bond returnsis 5%. 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 12.34for 12.34%), but do not round any intermediate work in the process.Margin of error for correct responses: +/- .05.

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3.9 Ratings (743 Votes)

K = Nx2

Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2

k=1

K =0.5x2

998.89 =? [(6*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^0.5x2

k=1

YTM% = 6.23 = cost of debt

cost of equity= cost of debt+risk premium =6.23+5=11.23%

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 = 6.23*(1-0.4)

= 3.738

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=3.74*0.4+11.23*0.6

WACC =8.23%

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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 $998.89, andpay interest semiannually. The firm's marginal tax rate is 40%. Theestimated risk premium between the company's stock and bond returnsis 5%. 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 12.34for 12.34%), but do not round any intermediate work in the process.Margin of error for correct responses: +/- .05.