Question

Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1,001.15, 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. Margin of error for correct responses: +/- .05.

please show how to solve using financial calculator

Answer 1

As demanded, we will use financial calculator.

We will enter 1000, then FV. The value of 1000 will be stored in FV (future value)

Similarly, we enter 30 and click PMT. 6% semiannual coupons means every 6 months we get 30.

Then we type 1001.15 then click on +|- so that we can make it negative and click on PV. This is cash outflow if we buy hence sign is opposite.

Finally we enter 1 and click on N. We treat 6 months as one period. The answer we get will give us effective rate for 6 months.

Then we click on CPT (compute) and then click on I/Y. We get our interest rate as 2.88% (for 6 month period)

Hence, yearly rate = 1.0288^2 - 1 = 5.847%

Equity return = 5+5.847 = 10.847%

Now the target debt is 40% and 60% equity

Therefore, wacc = 0.4*(5.847)*(1-0.4) + (0.6*10.847) = 1.40328+6.5082 = 7.91%