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.)

A.11.56%

B.5.24%

C.5.29%

D.10.53%

E.5.27%

Answer 1

First of all lets find cost of each component of capital

Cost of equity = D1/Po +g

=5.4(1+g)/82 + g

=5.4(1.06)/82 + 0.06

=5.724/82 + 0.06

=0.069805+0.06

=12.98%

Cost of bond 1

YTM = Interest + (Face value-selling price/n) / (Face value+selling price/2)

FV = 1000. selling price = 1000*97% = 970 , Interest = 1000*5%/2 = 25 , n =20*2 = 40

=25+(1000-970/40) / (1000+970/2)

=25+(30/40) / (1970/2)

=25+0.75 / 985

=25.75/985

=2.61%

annualised YTM = 2.61%*2 = 5.22%

After tax cost of debt 1 = 5.22%(1-tax rate)

=5.22%(1-0.38)

=5.22%(0.62)

=3.24%

Cost of bond 2

YTM = Interest + (Face value-selling price/n) / (Face value+selling price/2)

FV = 1000. selling price = 1000*105% = 1050 , Interest = 1000*6%/2 = 30 , n =9*2 = 18

=30+(1000-1050/18) / (1000+1050/2)

=30+(-50/18) / (2050/2)

=30-2.78 / 1025

=27.2/1025

=2.66%

annualised YTM = 2.66%*2 = 5.31%

After tax cost of debt 2 = 5.31%(1-tax rate)

=5.31%(1-0.38)

=5.31%(0.62)

=3.29%

Statement showing WACC

Source	Market value	W	K	WACC =W*K
Equity	820	85.40%	12.98%	11.085%
Debt1	82.45	8.59%	3.24%	0.278%
Debt2	57.75	6.01%	3.29%	0.198%
	960.2			11.561%

Thus Ans A) 11.56%