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. The company 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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %

Explanation / Answer

Solution.

Calculation of WACC.

Bond Issue #1 - Face 70.2 mil, 7.1%, market price 108.2%, 9 yr term.
Market value 75.96 mil,

Annual interest paid 4,984,200 x 70% = 3,488,940 net after tax cost / 75.96mil = 4.59%

Bond Issue #2 - Face 60.2 mil, 7.6%, market price 109.1%, 26 yr term
Market value 65,678,200,

Annual interest paid 4,575,200 x 70% = 3,202,640 / 65,678,200 = 4.88%

Common stock - 8.4 mil shs.

CAPM = 3.2% + 1.3 x 7.1% = 12.43%

WACC = 5.84%

Capital Amount Weight Cost WACC Bond 1      7,596,400.00 9.014 4.59%        0.41 Bond 2    65,678,200.00 77.934 4.88%        3.80 Equity    11,000,000.00 13.053 12.43%        1.62    84,274,600.00 100.000        5.84

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