Question

Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $989, 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 3%. 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

Weighted Average Cost of Capital = Ke * E +Kd * D

Where E is the ratio of equity in the capital structure and D means ratio of debt in total capital structure.

we have been given as 40% Debt & 60 % equity.

in addition, the cost of debt is caluated as Interest % ( 1- tax %)

so we can calculate Kd as 6%(1- 0.40%)

Kd= 3.6 %

It i sgiven to us that estimated risk premium between company's stock and bond returns is 3%, from here we can calculate the Ke as

Ke- kd =3%

ke= 6.6%

putting the values in the formula we will get

Wacc = = Ke * E +Kd * D

= 6.6% *0.60% + 3.6 % * .40 %

= 5.4 %