Big Door Company has 10.1 million shares outstanding, which are currently tradin

Question

Big Door Company has 10.1 million shares outstanding, which are currently trading for about $20 per share and have an equity beta of 1.2. Big Door has 18,500 outstanding bonds, with a 6 percent coupon rate, payable semi-annually and due in 10 years. The bonds are rated BBB. Currently the credit spread for BBB is 152 basis points over equivalent-maturity Government of Canada debt. The current yield on 10-year Canada bonds is 3 percent, compounded semi-annually. The risk-free interest rate is 3 percent, and the market risk premium is 6.8 percent. The company has a 35 percent tax rate. (Do not round intermediate calculations.) a. Calculate Big Door's WACC. (Round your answer to 2 decimal places.) WACC b. Calculate Big Door's unlevered beta, using the following formula: levered+8 debtx(1-TokD/E Round your answer to 2 decimal places.) Unlevered beta c. If Big Door was 50 percent debt-financed, what would be its WACC? Assume that the beta of its debt is unchanged by the capital structure change. (Round your answer to 2 decimal places.) WACC

Explanation / Answer

1)

Cost of equity = 3% + 1.2*6.8% = 11.16%

Cost of debt = 3% + 1.52% = 4.52%

Bond price = PV(4.52%/2, 10*2, -(6%/2)*1000,-1000) = 1118.02

Debt value = 18500*1118.02 = 20683347.06

Equity value = 10.1*106 * 20 = 202000000

Wd = 20683347.06 / (20683347.06 + 202000000) = 9.29%

We = 1 - 9.29% = 90.71%

WACC = 9.29%* 4.52% *(1-35%) + 90.71%*11.16% = 10.40%

2)

Beta(debt) = 0

Beta = 1.2 / (1 + (1-35%)*9.29%/90.71%) = 1.13

3)

WACC = 50%* 4.52% *(1-35%) + 50%*11.16% = 7.05%

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