Badger Corp. has an issue of 6%bonds outstanding with 6 monthsleft to maturity. The bonds arecurrently priced at $997.57, andpay interest semiannually. Thefirm's marginal tax rate is 40%. Theestimated risk premium betweenthe company's stock and bondreturns is 4%. The firm's expects tomaintain a capital structure with40% debt and 60% equity goingforward. The company'sW.A.C.C. is%.

Step 1: Calculate the after-tax cost of debt.Cost of debt = Annual interest payment / Current market…

Answered: Badger Corp. has an issue of 6% bonds…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1,008.97, 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.
Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1,008.11, 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 %. Margin of error for correct responses: +/-.10(%) Rounding and Formatting instructions: Do not enter dollar signs, percent signs, commas, X, or any words in your response. Do not round any intermediate work, but round your "final response to 2 decimal places (example: if your answer is 12.3456, 12.3456%, or $12.3456, you should enter 12.35).
Doha plc has some surplus funds that it wishes to invest in bonds. The company requires a return of 15% on bonds, and the finance director has asked you to analyse whether it should invest in either of the following bonds that are available:Company A: Expected profit 12% bonds, redeemable at par at the end of two more years, with a current market value of QAR 95 per QAR 100 bondCompany B: Expected profit 8% bonds, redeemable at QAR110 at the end of two more years, with a current market value of QAR 95 per QAR 100 bonda. Calculate the expected value (price) of the two bonds and evaluate if either offer an appropriate return for Doha Plc.b. Critically evaluate what would be the impact on the price of bonds if Doha Plc reduces their required return.c. Critically evaluate and discuss the factors that should be considered by the directors of a company when choosing whether to use debt or equity finance for a new projectd. Recently one director has attended a finance conference, on their…
A company currently has a bond outstanding that pays 6% coupon rate (coupons paid semiannually), a $1,000 par value and matures in 30 years. The bond is currently trading at $515.16. The company's tax rate is 25%. What is the firm's after-tax component cost of debt for purposes of calculating the weighted average cost of capital ("WACC")? Please show formulas, step by step instructions (without a financial calculator or Excel)
1) HMK Enterprises would like to raise $10.0 million to invest in capital expenditures. The company plans to issue five-year $1,000 bonds with a face value of and a coupon rate of 6.58% (annual payments). 6 The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings: Rating AAA AA A BBB BB YTM 6.13% 6.36% 6.52% 6.94% 7.55% Assuming the bonds will be rated AA, what will be the price of the bonds?
A company has an outstanding bond issue with a 7.75% coupon, paid semiannually, a current maturity of 20 years, and it sells for $967.97. The firm's income tax rate is 40%, What should the firm's managers use as an after-tax cost of debt for cost of capital purposes? 4.85% 2.42% 8.08% 4.04 %
Acorp's outstanding bonds have a 4.7% coupon bond with 6 months remaining until maturity is currently trading at $994.1. The firm's marginal tax rate is 30%. Assume semi-annual coupon payments. The company's after-tax cost of debt is__________%. Do not round any intermediate work, but round your final answer to 2 decimal places (example: enter 12.34 for 12.34%). Do not enter the % sign.
Years ago, Bustle Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $1,005, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? MUST SHOW WORK O 5.04% O 5.02% 5.59% 6.29%
Cotton On Ltd. currently has the following capital structure:Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annualbefore-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20years.Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each shareis $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growthrate in dividends, which is expected to continue indefinitely.Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividendrate of 12%.The firm's marginal tax rate is 30Calculate the current price of the preferred share if the average return of the shares in the sameindustry is 10%
Cotton On Ltd. currently has the following capital structure:Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annualbefore-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20years.Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each shareis $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growthrate in dividends, which is expected to continue indefinitely.Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividendrate of 12%.The firm's marginal tax rate is 30%.Required:a) Calculate the current price of the corporate bond? b) Calculate the current price of the ordinary share if the average return of the shares in the sameindustry is 9%? c) Calculate the current price of the preferred share if the average return of the shares in the sameindustry is 10% Answer in word
aline5 FDX Co. would like to raise $15 million to invest in capital expenditures. The company plans to issue five- year bonds with a face value of $1000 and a coupon rate of 8.55% (annual payments). The following table summarizes the yield to maturity for five-year (annual-pay) coupon corporate bonds of various ratings: Са Ratings YTM Aaa Aa A 2.78% Ва 3.19% Ва В 2.59% 2.65% 4.46% 5.88% 8.55% (1) Assuming the bonds are rated "B", what will the price of the bonds be? (2) How much total principal amount of these bonds must FDX issue to raise $15 million today, assuming the bonds are “B" rated? (Because FDX cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number which is higher.) (3) Suppose that when the bonds are issued, the price of each bond is equal $1179.75. What is the likely What must the rating of the bonds be for them to sell at par? (4) rating of the bonds? Are they junk bonds?
HMK Enterprises would like to raise $10.0 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1,000 and a coupon rate of 6.59% (annual payments). The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings: Rating AAA AA A BBB BB YTM 6.19% 6.36% 6.59% 6.96% 7.54% a. Assuming the bonds will be rated AA, what will be the price of the bonds? b. How much of the total principal amount of these bonds must HMK issue to raise $10.0 million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.) c. What must be the rating of the bonds for them to sell at par? d. Suppose that when the bonds are issued, the price of each bond is $961.60. What is the likely rating of the bonds? Are they junk bonds?

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