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 $83, and the book value per share is $8. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a 6 percent coupon, and sells for 98 percent of par. The second issue has a face value of $60 million, has a 7 percent coupon, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years. The most recent dividend was $5.5 and the dividend growth rate is 5 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.)

Explanation / Answer

Bond Issue #1 - Face 90 mil, 6%, market price 98%, 21yr term.
Market value 88.20 mil, Annual interest paid 8,100,000 x 65% = 5265,000 net after tax cost /88.20mil = 5.97%

Bond Issue #2 - Face 60 mil, 7%, market price 106%, 3 yr term
Market value 63.6 million, Annual interest paid 4,200,000 x 65% = 2,730,000 / 63,600,000 = 4.3%

Common stock - 4 million Shares
Expected Return = Next Div / Market Price + Growth %

D1 = D0 * 1.05 = 5.775

Expected Return = 5.775/83 + 0.05

Expected Return = 11.96%

WACC -

Debt #1 - 88.20 mil x 5.97% = 5,265,540
Debt #2 - 63.6 x 4.2% = 2,671,200
Common - 4.0 mil x $83 * 11.96%= 39,707,200

Value of Debt 1 = 88,200,000

Value of Debt 2 = 63,600,000

Value of Equity = 4 million * 83 =332,000,000

WACC = 39,707,200 / 332,000,000

WACC = 11.96%

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