Question

Marie Corp. has $1,882 in debt outstanding and $2,269 in common stock (and no preferred stock). Its marginal tax rate is 30%. Marie's bonds have a YTM of 5.6%. The current stock price (Po) is $45. Next year's dividend is expected to be $2.26, and it is expected to grow at a constant rate of 7% per year forever. 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 work in the process.

Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1,000.57, and pay interest semiannually. The firm's marginal tax rate is 40%. The estimated risk premium between the company's stock and bond returns is 4%. 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 work in the process.

Answer 1

Marie corp.

According to dividend discount model

Stock price = D1/(r-g)

D1 is the next year expected dividend

r is the cost of equity

g is growth rate

Therefore, 45= 2.26/(r-0.07)

r = 12.022%

Percentage of Equity = Equity/(Equity+Debt) = 54.662%

Percentage of Debt = Debt/(Equity+Debt) = 45.338%

WACC = Cost of equity*% of Equity+ Cost of Debt*% of Debt*(1-tax rate)

WACC = 12.022*0.54662 + 5.6*0.45338*(1-0.30) = 8.35%

Badger Corp.

Semiannual coupon payment = (6/2)%*1000 = $30

Price of the bond = C/(1+y)1 + C/(1+y)2 + C/(1+y)3 +......... + C/(1+y)N + FV/(1+y)N

Where, C is coupon payment

y is yield to maturity

N is number of periods to maturity

FV is face value of Bond

Therefore, 1000.57 = 1030/(1+y)1

y = 2.9413%

Annualized yield to maturity or cost of Debt = 2*2.9413 = 5.8826%

Cost of equity = Cost of debt + Risk premium = 5.8826% +4% = 9.8826%

WACC = 9.8826*0.60 + 5.8826*0.40*(1-0.40)

= 7.34%