Filer Manufacturing has 8.4 million shares of common stock outstanding. The curr

Question

Filer Manufacturing has 8.4 million shares of common stock outstanding. The current share price is $54, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $70.2 million and a coupon rate of 7.1 percent and sells for 108.2 percent of par. The second issue has a face value of $60.2 million and a coupon rate of 7.6 percent and sells for 109.1 percent of par. The first issue matures in 9 years, the second in 26 years. Suppose the company’s stock has a beta of 1.3. The risk-free rate is 3.2 percent, and the market risk premium is 7.1 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 40 percent. What is the company’s WACC?

Explanation / Answer

Tax rate 40%

Cost of equity re = risk free rate + beta * market risk premium = 3.2 + 1.3*7.1 = 12.43%

2)

K = N *2

BOND PRICE= [(Coupon/2)/(1 + YTM1/200)^k]     +   Par value/(1 + YTM1/200)^N*2
                   k=1

K = 9*2
108.2= [(7.1/2*100/100)/(1 + YTM1/200)^k]     +   100/(1 + YTM1/200)^9*2
k=1

YTM1 = 5.91%

K = N *2
BOND PRICE= [(Coupon/2)/(1 + YTM2/200)^k]     +   Par value/(1 + YTM2/200)^N*2
                   k=1

                    K = 26*2   
109.1= [(7.6/2*100/100)/(1 +YTM2/200)^k]     +   100/(1 + YTM2/200)^26*2
                   k=1

YTM2 = 6.846%

A-T cost of debt = (1 - tax rate) *(YTM1 * weight of bond 1 + YTM2 * weight of bond 2)

= ( 1 - .4) *( 5.91* (70.2*1.082/(70.2*1.082 + 60.2*1.091)) + * 6.846(60.2*1.091/(70.2*1.082 + 60.2*1.091))

=3.806%

Where weight of bond = market value of bond/( sum of market value of both the bonds)

WACC = A-T cost of debt * weight of bonds + cost of equity * weight of equity

3.806*(70.2*1.082 + 60.2*1.091)/(70.2*1.082 + 60.2*1.091 + 8.4*54) + 12.43 * 8.4*54/(70.2*1.082 + 60.2*1.091 + 8.4*54)

= 10.38

where weight of debt = market value of debt/(sum of market value of debt and equity)

weight of equty = market value of equity/(sum of market value of debt and equity)

market value of debt = sum of product of face value of each debt* corresponding selling price

market value of equity = outstanding shares * current market price

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