Big Door Company has 10 million shares outstanding, which are currently trading for about $15 per share and have an equity beta of 1.2. Big Door has 20,000 outstanding bonds, with a 6% coupon rate, payable semi-annually and due in 10 years. The bonds are rated BBB. Currently the credit spread for BBB is 150 basis points over equivalent-maturity Government of Canada debt. The current yield on 10-year Canada bonds is 4%, compounded semi-annually. The risk-free interest rate is 2.5%, and the market risk premium is 6.5%. The company has a 35% tax rate.
a. Calculate Big Door's WACC.
b. Calculate Big Door's unlevered beta, using the formula in footnote 6.
c. If Big Door was 50% debt-financed, what would be its WACO Assume that the beta of its debt is unchanged by the capital structure change.