Filer Manufacturing has 6300000 shares of common stock outstanding. The current

Question

Filer Manufacturing has 6300000 shares of common stock outstanding. The current share price is $20.16, and the book value per share is $9.08. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $62000000, has a 0.05 coupon, matures in 16 years and sells for 90 percent of par. The second issue has a face value of $45000000, has a 0.08 coupon, matures in 17 years, and sells for 87 percent of par. The most recent dividend was $2.32 and the dividend growth rate is 0.04. 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 0.34. What is Filer's cost of equity? Enter the answer with 4 decimals (e.g. 0.2345)

Explanation / Answer

Solution :- Calculation of the cost of equity (Ke) :-

Cost of equity (Ke) = (Expected dividend on share / Price of share of common stock) + Growth in dividends.

= (2.32 + 4 % of 2.32 / 20.16) + 0.04

= (2.32 + 0.0928 / 20.16) + 0.04

= (2.4128 / 20.16) + 0.04

= 0.119683 + 0.04

= 0.159683 i.e., 15.9683 %

Conclusion :- Cost of equity (Ke) = 15.9683 % (approx).

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