Question

Filer Manufacturing has 6921843 shares of common stock outstanding. The current share price is $37.61, and the book value per share is $3.11. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $77024139, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $74457059, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par. The most recent dividend was $2.04 and the dividend growth rate is 0.03. 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 0.31. What is Filer's WACC?

Answer 1

Cost of equity can be calculated with the dividend capitalization model:

Cost of equity (K_e)= (D₁/P₀)+g

= (2.04/37.61) + 0.03

= 0.0842

= 8.42%

Cost of debt can be calculated as current yield, which can be calculated as coupon payment divided by current selling price.

Cost of debt on first issue = 3851206/65470518

= 6%

Cost of debt on second issue = 4467424/685004942

= 1%

Weighted average cost of debt (k_d)= 6% × 77024139/(77024139+74457059) + 1% × 74457059/(77024139+74457059)

= 3.05% + 0.49%

Therefore K_d = 3.54%

WACC = K_e × (market value of equity /Total capital )+ K_d × (1-tax rate) × market value of debt / total capital

= 5.32 + 0.90

= 6.22