Filer Manufacturing has 9500000 shares of common stock outstanding. The current

Question

Filer Manufacturing has 9500000 shares of common stock outstanding. The current share price is $59.76, and the book value per share is $9.52. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $67000000, has a 0.06 coupon, matures in 8 years and sells for 93 percent of par. The second issue has a face value of $68000000, has a 0.07 coupon, matures in 7 years, and sells for 96 percent of par.

The most recent dividend was $1.23 and the dividend growth rate is 0.05. 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 0.34.

What is Filer's cost of equity? Enter the answer with 4 decimals (e.g. 0.2345)

Explanation / Answer

Price of the share=Dividend(1+growth rate)/(Cost of equity -Growth rate)

$59.76=$1.23(1+0.05)/(cost of equity-0.05)

$59.76=$1.2915/(cost of equity-0.05)

Cost of Equity-0.05=$1.2915/$59.76=0.02161

Cost of Equity=0.02161+0.05=0.07161=7.16%

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