Filer Manufacturing has 7.9 million shares of common stock outstanding. The curr

Question

Filer Manufacturing has 7.9 million shares of common stock outstanding. The current share price is $49, and the book value per share is $3. The company also has two bond issues outstanding. The first bond issue has a face value of $69.2 million and a coupon rate of 6.6 percent and sells for 108.7 percent of par. The second issue has a face value of $59.2 million and a coupon rate of 7.1 percent and sells for 108.1 percent of par. The first issue matures in 7 years, the second in 28 years. Suppose the company’s stock has a beta of 1.2. The risk-free rate is 2.7 percent, and the market risk premium is 6.6 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?

Explanation / Answer

BOOK VALUE WEIGHTS WEIGHTS cost cost*weight EQUITY 7900000 23700000 0.155819 10.62 1.654793 NO OF EQUITY SHARES 7900000 DEBT 69200000 69200000 0.454964 3.388322 1.541564 COST OF EQUITY CAPITAL IRF+(MARKET RETURN-IRF)*BETA 10.62 percent DEBT 59200000 59200000 0.389218 4.320107 1.681462 152100000 COST OF FIRST DEBT INTEREST+(PARVALUE- MARKETVALUE)/YEARS TO MATURITY (PARVALUE+ MARKETVALUE)/2 percent after tax cost of debt= before tax cost* (1-tax rate) weighted average cost of capital with book value weight 4.877819 COST OF DEBT INTEREST+(PARVALUE- MARKETVALUE)/YEARS TO MATURITY / (PARVALUE+ MARKETVALUE)/2 3707142.857 72210200 5.133822 3.388322 INTEREST+(PARVALUE- MARKETVALUE)/YEARS TO MATURITY (PARVALUE+ MARKETVALUE)/2 cost of second debt INTEREST+(PARVALUE- MARKETVALUE)/YEARS TO MATURITY / (PARVALUE+ MARKETVALUE)/2 4031942.857 61597600 6.545617 4.320107 MARKET VALUE book value market value WEIGHTS cost cost*weight EQUITY 7900000 387100000 0.73549 10.62 7.810907 DEBT 69200000 75220400 0.142919 3.388322 0.484255 DEBT 59200000 63995200 0.121591 4.320107 0.525286 total value of firm 526315600 weighted average cost of capital with market value weight 8.820447

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