Filer Manufacturing has 10 million shares of common stock outstanding. The curre
ID: 2798236 • Letter: F
Question
Filer Manufacturing has 10 million shares of common stock outstanding. The current share price is $82, 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 $85 million, has a 5 percent coupon, and sells for 97 percent of par. The second issue has a face value of $55 million, has a 6 percent coupon, and sells for 105 percent of par. The first issue matures in 20 years, the second in 9 years.
The most recent dividend was $5.4 and the dividend growth rate is 6 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 38 percent.
Required: What is the company's WACC? (Do not round your intermediate calculations.)
Explanation / Answer
1 B C 2 Market Value of First Bonds=Number of Bonds*Sale value) 3 Market Value of debt=850000*97 4 Market value of debt= $ 82,450,000.00 5 6 Market value of common stock=Shares outstanding* selling price 7 Market value of common stock=10000000*$82 8 Market value of common stock= $ 820,000,000.00 9 10 Market Value of First Bonds=Number of Bonds*Sale value) 11 Market Value of debt=550000*105 12 Market value of debt= $ 57,750,000.00 13 14 Total market value of firm= 15 Market value of First Bonds $ 82,450,000.00 16 Market value of common stock $ 820,000,000.00 17 Market Value of second bonds $ 57,750,000.00 18 Total market value of firm= $ 960,200,000.00 19 20 21 Weight of First Bonds=($82450000/960200000)*100 9% 22 Weight of common stock=($820000000)/960200000)*100 85% 23 Weight of Second Bonds=($57750000/960200000)*100 6% 24 Total weight of portfolio 100% 25 26 Cost of First Bonds 27 Face Value 100 28 Current Price of Bonds 97 29 Maturity Period N= 20 30 Coupon Rate = 5.00% 31 Coupon amount or PMT= 5 32 Number of payment in year 2 33 Yield to Maturity= RATE(C29*C32,C30/C32*C27,-C28,C27)*2 34 Befor tax cost of debt= 5.24% 35 After tax cost of debt=5.24%(1-.38) 0.032488 36 After tax cost of debt= 3.249% 37 38 Cost of second Bonds 39 Face Value 100 40 Current Price of Bonds 105 41 Maturity Period N= 9 42 Coupon Rate = 6.00% 43 Coupon amount or PMT= 6 44 Number of payment in year 2 45 Yield to Maturity= RATE(C41*C44,C42/C44*C39,-C40,C39)*2 46 Befor tax cost of debt= 5.29% 47 After tax cost of debt=5.29%(1-.38) 0.032798 48 After tax cost of debt= 3.280% 49 50 Cost of equity using dividend growth model=Dividend*(1+g)/Current sellng Price 51 Cost of Equity=(5.4*(1.06)/82)+.06 12.980% Weighted average cost of capital= (weight of first bonds*First bonds cost+Weight of common stock*cost of equity+Weight of second Bonds* cost of Second bonds) Weighted average cost of capital= 9%*3.25%+85%*12.98%+6%*3.28% Weighted average cost of capital= 11.52%
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