Filer Manufacturing has 7.8 million shares of common stock outstanding. The curr

Question

Filer Manufacturing has 7.8 million shares of common stock outstanding. The current share price is $48, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $69.0 million and a coupon rate of 6.5 percent and sells for 108.8 percent of par. The second issue has a face value of $59.0 million and a coupon rate of 7.0 percent and sells for 107.9 percent of par. The first issue matures in 8 years, the second in 27 years.

Suppose the company’s stock has a beta of 1.2. The risk-free rate is 2.6 percent, and the market risk premium is 6.5 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 35 percent. What is the company’s WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Filer Manufacturing has 7.8 million shares of common stock outstanding. The current share price is $48, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $69.0 million and a coupon rate of 6.5 percent and sells for 108.8 percent of par. The second issue has a face value of $59.0 million and a coupon rate of 7.0 percent and sells for 107.9 percent of par. The first issue matures in 8 years, the second in 27 years.

Suppose the company’s stock has a beta of 1.2. The risk-free rate is 2.6 percent, and the market risk premium is 6.5 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 35 percent. What is the company’s WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Market Value of equity = 7,800,000 * 48 = 374,400,000

Market value of bond 1 = 69,000,000*1.088 = 75,072,000

Market value of bond 2 = 59,000,000*1.079 = 63,661,000

Total value = 513,133,000

Weight of equity =We= 374,400,000/513,133,000 = 0.7296

Weight of bond 1 = Wd1= 75,072,000/513,133,000 = 0.1463

Weight of bond 2 = Wd2=1-0.1463-0.7296 =0.1241

Cost of equity = Re = Rf + beta*Market risk premium = 2,6 + 1.2* 6.5 = 10.4%

Pre tax cost of bond 1 =rate(nper,pmt,pv,fv)*2 =rate(8*2,65/2,-1088,1000) *2 = 5.1443% (We are multiplying by 2 to get the annual yield, since number of years and coupon payment are semi-annual)

After tax cost of bond 1= Rd1= Pretax cost *(1-tax rate) = 5.1443%*(1-0.35) = 3.3438%

Pre tax cost of bond 2 =rate(nper,pmt,pv,fv)*2 =rate(27*2,70/2,-1079,1000) *2 =6.3826% (We are multiplying by 2 to get the annual yield, since number of years and coupon payment are semi-annual)

After tax cost of bond 2= Rd2= Pretax cost *(1-tax rate) = 6.3826%*(1-0.35) = 4.1487%

WACC = We*Re + Wd1* Rd 1 + Wd2* Rd2

WACC =0.7296*10.4 + 0.1463 * 3.3438 + 0.1241*4.1487 = 8.59%

WACC = 8.59%

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