Filer Manufacturing has 6 million shares of common stock outstanding. The curren
ID: 2755083 • Letter: F
Question
Filer Manufacturing has 6 million shares of common stock outstanding. The current share price is $78, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $65 million, has a 7 percent coupon, and sells for 98 percent of par. The second issue has a face value of $35 million, has a 8 percent coupon, and sells for 106 percent of par. The first issue matures in 22 years, the second in 5 years.
The most recent dividend was $5 and the dividend growth rate is 8 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 30 percent.
Filer Manufacturing has 6 million shares of common stock outstanding. The current share price is $78, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $65 million, has a 7 percent coupon, and sells for 98 percent of par. The second issue has a face value of $35 million, has a 8 percent coupon, and sells for 106 percent of par. The first issue matures in 22 years, the second in 5 years.
Explanation / Answer
Debt
Market value of debt Md1 = 65,000,000 x 98%
= 63,700,000
Market value of debt Md2 = 35,000,000 x 106%
= 37,100,000
Cost of debt Kd1= 7.18% x(1-0.30) =5.03%
Cost of debt Kd2= 6.57% x(1-030) = 4.60%
Equity
Market value of equity Me= no. of stocks outstanding x current price
= 6,000,000 x 78
= 468,000,000
Ke =Do x(1+g)/Po +g
= 5 x(1+0.08)/78 +0.08
= 14.92%
WACC= (Kd1 x Md 1 + Kd2 x Md2 + Ke x Me)/(Md1+Md2+Me)
= (0.0503x 63,700,000+ 0.046 x37, 100,000 + 0.1492 x 468,000,000)/(63,700,000+ 37, 100,000 +468,000,000)
= 74,736,310 / 568800000
= 13.14%
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