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

Question

Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1001, 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 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 12.34 for 12.34%), but do not round any intermediate work in the process.

Explanation / Answer

Badger Corp Details Amt $ Bond Face value               1,000 Bond Market Price               1,001 Annual Interest @6%                     60 Years to maturity                   0.50 yrs YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3   YTM =[60+(1000-1001)/0.5]/(1000+1001*2)/3 YTM =5.79% Tax rate =40% Post Tax Bond cost =5.79%*(1-40%)= 3.47% Risk premium of stock over bond YTM =5% So Expected stock return=5.79+5= 10.79% debt & Equity % =40% & 60% So WACC = 0.40*3.47%+0.60*10.79% 7.86% So required WACC =7.86% *pls note for stock premium I have taken the pretax bond return % , not post tax as nothing specified clearly.

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