Filer Manufacturing has 4 million shares of common stock outstanding. The curren

Question

Filer Manufacturing has 4 million shares of common stock outstanding. The current share price is $76, 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 $90 million, has a 5 percent coupon, and sells for 94 percent of par. The second issue has a face value of $70 million, has a 6 percent coupon, and sells for 104 percent of par. The first issue matures in 20 years, the second in 3 years.

The most recent dividend was $4.8 and the dividend growth rate is 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 35 percent.

Required: What is the company's WACC? (Do not round your intermediate calculations.)

10.89%

5.5%

4.56%

10.06%

5.03%

Explanation / Answer

Total captial = (4 million shares x $76) + ($90 million debt x 94%) + ($70 million debt x 104%)

= $461.40 million

Cost of equity = D1/P0 + g

= [4.80 x (1.08)] / 76 + 0.08

= 14.82%

Weighted cost of equity = 14.82 x (4 million x $76) / $461.40 million

= 9.68%

Cost of first debt = 5(1-0.35) = 3.25%

Cost of second debt = 6(1-0.35) = 3.90%

Overall cost of debt = (3.25 x 90 million x 94%) + (3.90 x 70 million x 104%) / (90 million x 94%) + (70 million x 104%)

= 558.87 / 157.40

= 3.55%

Weighted cost of debt = 3.55 x 157.4 / 461.40 = 1.21%

WACC = Weighted cost of debt + Weighted cost of equity

= 9.68 + 1.21

= 10.89%

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