Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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.) |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started