Question

Filer Manufacturing has 5200000 shares of common stock outstanding. The current share price is $34.62, and the book value per share is $9.96. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $57000000, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $61000000, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par. The most recent dividend was $1.28 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 0.26. What is Filer's WACC? Enter the answer with 4 decimals (e.g. 0.2345)

Answer 1

Calculation of WACC
Source of Capital	Market value	Weights as per market value	Cost of capital
A	B	C	D	C * D
Common stock	180024000	0.64	0.109561	0.0696
First Bond Issue	47310000	0.17	0.03700	0.0062
Second Bond Issue	56120000	0.20	0.04440	0.0088
WACC				0.0845
Filer's WACC =	0.0845
Working
Calculation of cost of equity
Current Share price = Dividend payable at the end of the year / (Cost of equity - Dividend growth rate)
Current Share price = $34.62
Dividend payable at the end of the year = Recent dividend * (1+dividend growth rate) = $1.28 * (1+0.07) = 1.3696
34.62 = 1.3696 / (Cost of equity -0.07)
Cost of equity - 0.07 = 0.039561
Cost of equity = 0.109561 i.e. 10.96%
After tax cost of first bond issue = Coupon rate * (1-tax rate) = 0.05*(1-0.26) = 0.037
After tax cost of second bond issue = Coupon rate * (1-tax rate) = 0.06*(1-0.26) = 0.0444