Filer Manufacturing has 7.6 million shares of common stock outstanding. The curr

Question

Filer Manufacturing has 7.6 million shares of common stock outstanding. The current share price is $46, and the book value per share is $3. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $68.6 million and a coupon rate of 6.3 percent and sells for 109.0 percent of par. The second issue has a face value of $58.6 million and a coupon rate of 6.8 percent and sells for 107.5 percent of par. The first issue matures in 7 years, the second in 28 years.

Suppose the company

Filer Manufacturing has 7.6 million shares of common stock outstanding. The current share price is $46, and the book value per share is $3. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $68.6 million and a coupon rate of 6.3 percent and sells for 109.0 percent of par. The second issue has a face value of $58.6 million and a coupon rate of 6.8 percent and sells for 107.5 percent of par. The first issue matures in 7 years, the second in 28 years.

Suppose the company

Explanation / Answer

SOLUTION:

First, let us find the cost of equity of the company. The given information allows us to solve using CAPM,

RE = 0.024 + 1.3(0.063) = 0.1059 or 10.59%

Next we will find the YTM on both bond issues. Now we find,

Bond1 = 4.75%

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