Silk Manufacturing has 7.3 million shares of common stock outstanding. The curre

Question

Silk Manufacturing has 7.3 million shares of common stock outstanding. The current share price is $43, 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 $68.0 million and a coupon rate of 6.0 percent and sells for 109.3 percent of par. The second issue has a face value of $58.0 million and a coupon rate of 6.5 percent and sells for 106.9 percent of par. The first issue matures in 7 years, the second in 28 years. Suppose the company's stock has a beta of 1.4. The risk-free rate is 2.1 percent, and the market risk premium is 6.0 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 34 percent. What is the company's WACC?

Cost of Equity

Explanation / Answer

cost of equity = 2.1% + 1.4*6% = 10.5%

Cost of debt:

Ist issue:

1093= 30PVIFA(Kd,14)+1000PVIF(Kd,14)

Kd=(2.22x2)=4.44%

Wt= 68/126=.54

2nd issue:

1069= 32.5PVIFA(Kd,56)+1000PVIF(Kd,56)

Kd= (2.99x2)=5.98%

Wt= 58/126= .46

Since the overall cost of debt is the weighted average implied by the two outstanding debt issues

WACC= 4.44x.66x.54+(5.98x.66x.46)= 3.40%

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