Filer Manufacturing has 8 million shares of common stock outstanding. The curren

Question

Filer Manufacturing has 8 million shares of common stock outstanding. The current share price is $50, 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 $69.4 million and a coupon rate of 6.7 percent and sells for 108.6 percent of par. The second issue has a face value of $59.4 million and a coupon rate of 7.2 percent and sells for 108.3 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 2.8 percent, and the market risk premium is 6.7 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

Market value of equity=outstanding shares*market price
=50*8mn=400mn
Market value of debt 1 and 2 is given by product of price quote and par value of the bond
=(1.086*69.4*10^6)+(1.083*59.4*10^6)=139,689,600

The return on stock can be found using capm formuale
=Rf+beta*(Rm-Rf)
=2.8%+(1.3*6.7%)=11.51%

The return on bond can be found by using ytm of the bond
This can be found using rate function in excel
Bond 1:
=rate(nper,pmt.,pv,fv,type,guess)
nper=9
pmt=6.7%/2*69.4*10^6
pv=1.086*69.4*10^6
fv=69.4*10^6
type=0
guess=1
=rate(9,6.7%/2*69.4*10^6,-1.086*69.4*10^6,69.4*10^6,0,1)
=2.28%*2=4.56%

Bond 2:
=rate(nper,pmt.,pv,fv,type,guess)
nper=26
pmt=7.2%/2*59.4*10^6
pv=1.083*69.4*10^6
fv=59.4*10^6
type=0
guess=1
=rate(26,7.2%/2*59.4*10^6,-1.083*59.4*10^6,59.4*10^6,0,1)
=3.13%*2 (Annual)
=6.26%

WACC=(After tax cost of debt 1*wt of debt 1)+(After tax cost of debt 2*wt of debt 2)+(wt

of equity*cost of equity)

Wt of debt 1=75368400/(75368400+64330200+400000000)=14%
wt of debt 2=64330200/(75368400+64330200+400000000)=11.9%
wt of equity=400000000/(75368400+64330200+400000000)=74.1%

WACC=(4.56%*(1-0.4)*14%)+(6.26%*(1-0.4)*11.9%)+(11.51%*74.1%)
=9.36%

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