Calculating the WACC Filer Manufacturing has 8.8 million shares of common stock

Question

Calculating the WACC Filer Manufacturing has 8.8 million shares of common stock outstanding. The current share price is $58. and the book value per share is $3. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $71.0 million and a coupon rate of 7.5 percent and sells for 107.8 percent of par. The second issue has a face value of $61.0 million and a coupon rate of 8.0 percent and sells for 109.9 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 3.6 percent, and the market risk premium is 7.5 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 34 percent. What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places, (e.g.. 32.16)) WACC %

Explanation / Answer

Answer:Ke=3.6%+1.1*7.5%=11.85%

First bond=

1078=$37.5*PVIFA(r%,14)+$1000*PVIF(r%,14)

r=3.06% (semiannually)

R=3.06%*2=6.12% (annually)

Kd (first bond after tax)=6.12%(1-0.34)=4.0392%

Second Bond:

1099=$40*PVIFA(r%,56)+$1000*PVIF(r%,56)

r=3.59% (semiannually)

R=3.59%*2=7.18% (annually)

After tax=7.18%*0.66=4.7388%

Capital structure Market value Weight Cost of capital WACC Equity 510.4 0.780455582 11.85% 9.25% First bond 76.538 0.117034697 4.04% 0.47% Second bond 67.039 0.102509721 4.74% 0.49% Total 653.977 10.21%

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