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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 $993.54, 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 12.34for 12.34%), but do not round any intermediate work in the process.Margin of error for correct responses: +/- .05.

Answer & Explanation Solved by verified expert
3.6 Ratings (485 Votes)

                  K = Nx2
Bond Price =? [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =0.5x2
993.54 =? [(6*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^0.5x2
                   k=1
YTM% = 7.34 = cost of debt

Cost of equity = cost of debt + risk premium = 7.34+6 = 13.34%

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 = 7.34*(1-0.4)
= 4.404
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=4.4*0.4+13.34*0.6
WACC =9.76%

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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 $993.54, 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 12.34for 12.34%), but do not round any intermediate work in the process.Margin of error for correct responses: +/- .05.

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