Filer Manufacturing has 9.6 million shares of common stock outstanding. The curr

Question

Filer Manufacturing has 9.6 million shares of common stock outstanding. The current share price is $46, 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 $69 million, has a n 8 percent coupon, and sells for 92 percent of par. The second issue has a face value of $62.4 million, has a 7.99 percent coupon, and sells for 94.8 percent of par. The first issue matures in 10 years, the second in 6 years.

The most recent dividend was $3 and the dividend growth rate is 5.8 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent.


What is the company's WACC?
11.21%
11.86%
11.43%
10.65%
10.76%

Explanation / Answer

Calculation of debt 1st bond Semiannual payment = $69*4% = 2.76 million Price of 1st bond =92%*$69 = $63.48 million $63.48 = 2.76/(1+r/2) + 2.76/(1+r/2)^2 ....71.76/(1+r/2)^20 r =9.24% 2nd bond Semiannual Payment = $62.4*7.99%/2 = $2.49288 million Price = 94.8%* $62.4 =59.1552 million 59.1552 = $2.49288/(1+r/2) + $2.49288/(1+r/2)^2 ....64.89288/(1+r/2)^12 r = 9.1% Cost of debt = weighted average of two bonds =9.1%*59.1552/(59.1552 +63.48 ) + 9.24%*63.48/(59.1552 +63.48 ) =9.17% Total debt = 59.1552 +63.48 = 122.6352 million Cost of equity $46=$3*(1+5.8%)/(r-5.8%) R =12.70% total equity =9.6*46 = 441.6 million V = E+D =441.6 million +122.6352 million =$564.2352 million WACC = 12.70%*441.6/$564.2352 + (1-34%)*9.1%*122.6352/$564.2352 WACC= 11.24% Answer 11.21%

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