Filer Manufacturing has 8.3 million shares of common stock outstanding. the curr

Question

Filer Manufacturing has 8.3 million shares of common stock outstanding. the current share price is $53, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. the first bond issue has a face value of $70.0 million and a coupon rate of 7.0 percent and sells for 108.3 percent of par. the second issue has a face value of $60.0 million and a coupon rate of 7.5 percent and sells for 108.9 percent of par. the first issue matures in 8 years, the second in 27 years. suppose the company's stock has a beta of 1.2. the risk-free rate is 3.1 percent, and the market risk premium is 7 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. both bonds make semiannual payments. the tax rate is 35 percent. what is the company's WACC? (Please show what numbers I need to enter in excel)

Explanation / Answer

(a) Cost of equity = Risk-free rate + Beta x Market Risk premium

= 3.1% + (1.2 x 7%) = 11.5%

Total (Market) Value of equity = 8.3 million x $53 = $439.9 M

(b) Cost of debt (Total value of debt = $(70 + 60)M = $130M)

(i) First Bond: face value $70 million, Selling at 108.3 of Par (= $1,083, assuming the standard par value = $1,000)

Proportion in total debt = $70M / $130M = 53.85%

Cost of debt, kd = Post-Tax Annual coupon payment / Market Value

= $1,000 M x 7% x 0.65 / $1,083 = 4.2%

(ii) First Bond: face value $60 million, Selling at 108.9 of Par (= $1,089, assuming the standard par value = $1,000)

Proportion in total debt = $60M / $130M = 46.15%

Cost of debt, kd = Post-tax Annual coupon payment / Market Value

= $1,000 M x 7.5% x 0.65 / $1,089 = 4.48%

(iii) Weighted average cost of debt

= (53.85% x 4.2%) + (46.15% x 4.48%)

= 2.26% + 2.07% = 4.33%

(c) Proportion of equity in capital structure = $439.9 M / $(439.9 + 130) M = 77.19%

Proportion of debt in capital structure = $130 M / $(439.9 + 130) M = 22.81%

(d) WACC

= (77.19% x 11.5%) + (22.81% x 4.33%)

= 8.88% + 0.99%

= 9.87%

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