Question

Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $987.85, 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 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 work in the process.

Answer 1

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%