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Big Door Company has 8.8 million shares outstanding, which are currently trading for about $10 per share and have an equity beta of 1.2. Big
| Big Door Company has 8.8 million shares outstanding, which are currently trading for about $10 per share and have an equity beta of 1.2. Big Door has 18,700 outstanding bonds, with a 5% coupon rate, payable semi-annually and due in 10 years. The bonds are rated BBB. Currently the credit spread for BBB is 137 basis points over equivalent-maturity Government of Canada debt. The current yield on 10-year Canada bonds is 3%, compounded semi-annually. The risk-free interest rate is 2.7%, and the market risk premium is 7%. The company has a 35% tax rate. (Do not round intermediate calculations.) |
| a. | Calculate Big Door's WACC. (Round your answer to 2 decimal places.) | |
| b. | Calculate Big Door's unlevered beta, using the following formula: | |
| U=levered+debt(1Tc)D/E1+(1Tc)D/EU=levered+debt(1Tc)D/E1+(1Tc)D/E | ||
| (Round your answer to 2 decimal places.) | ||
| c. | If Big Door was 50% 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.) | |
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