Filer Manufacturing has 5900000 shares of common stock outstanding. The current

Question

Filer Manufacturing has 5900000 shares of common stock outstanding. The current share price is $77.52, and the book value per share is $3.91. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $42000000, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $54000000, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par. The most recent dividend was $1.05 and the dividend growth rate is 0.07. 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 0.38. What is Filer's aftertax cost of debt? Enter the answer with 4 decimals (e.g. 0.2345)

Explanation / Answer

let us find the ytm of the bond using rate formuale in excel

=rate(nper,pmt,pv,fv,type)

=rate(20,((5%/2)*(42000000),(-83%*42000000),42000000,0)

=3.72%

annual=3.72%*2=7.44%

second bond:

=rate(40,(3%*54000000),(-92%*54000000),54000000,0,1)

=3.37%

annual=3.37%*2=6.73%

Market value of fitst debt=(83%*42000000)=34860000

second bond=92%*54000000=49680000

Weight of 1st>

=41.23%

second>

wt average debt=(41.23%*7.44%)+(58.77%*6.73%)

=7.03%

after tax cost of debt=7.03%*(1-38%)

=4.36%

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