Filer Manufacturing has 7500000 shares of common stock outstanding. The current

Question

Filer Manufacturing has 7500000 shares of common stock outstanding. The current share price is $46.74, and the book value per share is $8.91. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $78000000, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $48000000, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par. The most recent dividend was $2.11 and the dividend growth rate is 0.06. 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 0.28. What is Filer's WACC? Enter the answer with 4 decimals (e.g. 0.2345)

Explanation / Answer

Solution:

First find the cost of equity for the company

RE = [$2.11(1.06) / $46.74] + .06

RE = .1079, or 10.79%

Then find the YTM on both bond issues

P1 = $830 = $25(PVIFAR%, 20) + $1,000(PVIFR%, 20)

R = 3.72%

YTM = 3.72%×2

YTM = 7.44%

P2 = $920 = $30(PVIFAR%, 40) + $1,000(PVIFR%, 40)

R = 3.37%

YTM = 3.37%×2

YTM = 6.73%

Need the weight of each bond as a percentage of the total debt

xD1 = .83($78,000,000) / $108,900,000

xD1 = .5944

xD2 = .92($48,000,000) / $108,900,000

xD2 = .4055

-Multiply the weighted average cost of debt times one minus the tax rate to find the weighted average after-tax cost of debt

RD = (1 – .28)[(.5944)(.0744) + (.4055)(.0673)]RD = .0515, or 5.15%

-The market value of equity is the share price times the number of shares

MVE = 7,500,000($46.74) = $350,550,000

-market value of debt

MVD = .83($78,000,000) + .92($48,000,000) = $108,900,000

-total market value of the company

V = $350,550,000 + 108,900,000 = $459,450,000

-market value weights of equity and debt

E/V = $350,550,000 / $459,450,000= .7630

D/V = 1E/V = .2370

WACC = .7630(.1079) + .2370(.0515)

WACC = .094494, or 9.4494%

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.