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.)

rev: 09_20_2012, 12_13_2012, 12_20_2012,12_22_2012,12_28_2012

11.56%

5.24%

5.29%

10.53%

5.27%

Answer 1

Filer	Value	Weight	Cost
Equity	820.0	85.40%	12.98%
Bond 1	82.5	8.59%	5.25%
Bond 2	57.8	6.01%	5.29%
Total	960.2	WACC	11.56%

Value of equity = 10 x 82 = 820, Value of Bond 1 = 85 x 97% = 82.5, Value of Bond 2 = 55 x 105% = 57.8

=> Total Value = 960.2

Weight = Value / Total

Cost of equity = D0 x (1 + g) / P + g = 5.4 x (1 + 6%) / 82 + 6% = 12.98%

Cost of bond can be calculated using I/Y function on a calculator

N = 20, PMT = 5, PV = -97, FV = 100 => Compute I/Y = 5.25% for Bond 1

N = 9, PMT = 6, PV = -105, FV = 100 => Compute I/Y = 5.29% for Bond 2

WACC = 85.40% x 12.98% + (8.59% x 5.25% + 6.10% x 5.29%) x (1 - 38%) = 11.56%