Question

Filer Manufacturing has 7 million shares of common stock outstanding. The current share price is $73, and the book value per share is $8. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a 8 percent coupon, and sells for 98 percent of par. The second issue has a face value of $55 million, has a 9 percent coupon, and sells for 107 percent of par. The first issue matures in 23 years, the second in 7 years.

The most recent dividend was $4.5 and the dividend growth rate is 8 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 30 percent.

Required: What is the company's WACC? (Do not round your intermediate calculations.)

A 12.79%

B 8.19%

C 7.69%

D 15.88%

E 7.94%

Please show work

Answer 1

It is option A

First let us find the market vlaue of equity=7*10^6*73=511000000

Market value of bond 1=(98/100)*75*10^6=7350000

Market value of bond 2=(107/100)*55*10^6=58850000

Let us find the ytm of both the bonds using nper formuale in excel

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

bond 1:=RATE(46,(8%/2*75*10^6),-,7350000,0,1)=4.1%

annual yrm=4.10%*2=8.19%

Bond 2:=RATE(14,(9%/2*55*10^6),-58850000,55*10^6,0,1)=3.84%

Annual YTM=3.84%*2=7.69%

Wt of bond 1=(7350000)/(7350000+58850000)=55.53%

Wt of bond 2=1-55.53%=44.47%

Weighted average YTM of bond=(55.53%*8.19%)+(44.47%*7.69%)=7.97%

After tax cost of debt=7.97%*(1-30%)=5.58%

As per dividedn discount model

Stock price= D0*(1+g)/(k-g)

Here k is cost of equity

K=(D0*(1+g)/stock)+g

=(4.5*(1+8%)/73)+8%=14.66%

WACC=(wt of debt*cost of debt)+(wt of equity*cost of equity)

Wt of debt=(7350000+58850000)/(7350000+58850000+511000000)=20.57%

Wt of equity=1-20.57%=79.43%

WACC+(20.57%*5.58%)+(79.43%*14.66%)=12.79%