Filer Manufacturing has 8.5 million shares of common stock outstanding. The curr
ID: 2745496 • Letter: F
Question
Filer Manufacturing has 8.5 million shares of common stock outstanding. The current share price is $55, 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 $70.4 million and a coupon rate of 7.2 percent and sells for 108.1 percent of par. The second issue has a face value of $60.4 million and a coupon rate of 7.7 percent and sells for 109.3 percent of par. The first issue matures in 7 years, the second in 28 years. Suppose the company's stock has a beta of 1.1. The risk-free rate is 3.3 percent, and the market risk premium is 7.2 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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Explanation / Answer
MV of equity= 8.5 * 55 = 467.5 million
MV of Bond 1 = 70.4 * 108.1 = 76.10 million
MV of Bond 2 = 60.4 * 1.093 = 66.01 million
Cost of equity = risk free rate + beta * market risk premium = 3.3 + 1.1*7.2 = 11.22%
We determine the yield of each bonds to find the before tax cost of debt
Bond 1 -> PV = -108.1, FV = 100, PMT = 7.2%/2 of 100 = 3.6, N = 14
Yield = 2.89%
Annual Yield after tax = 2.89% * 2 (1-T) = 2.89% * 2 *(1-0.34) = 3.81%
Bond 2 -> PV = -109.3, FV = 100, PMT = 7.7%/2* 100 = 3.85, N = 56
Yield = 3.47%
Annual yield after tax = 3.47%*2*(1-0.34) = 4.58
Total Capital = equity + bond 1 + bond 2 = 467.5 + 76.1 + 66.01 = 609.6
weight of equity = 0.767
Weight of Bond 1 = 0.125
weight of bond 2 = 0.108
WACC = .767*11.22 + 0.125*3.81 + .108*4.58 = 8.606 + 0.476 + 0.495
WACC = 9.58%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.