Question

Filer Manufacturing has 5,090,729 shares of common stock outstanding. The current share price is $34.05, and the book value per share is $5.1. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $40,617,370, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $62,370,359, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par.

The most recent dividend was $1.77 and the dividend growth rate is 0.05. 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 0.34.

What is Filer's WACC?

Just the answer of what is the WACC. I don't need the step by step

Answer 1

Answer is 8.45%

Debt:

1^st Issue of Bonds:

Face Value = $40,617,370

Market Value = 83% * $40,617,370
Market Value = $33,712,417.10

Annual Coupon Rate = 5.00%
Semiannual Coupon Rate = 2.50%
Semiannual Coupon = 2.50% * $40,617,370
Semiannual Coupon = $1,015,434.25

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Let semiannual YTM be i%

$33,712,417.10 = $1,015,434.25 * PVIFA(i%, 20) + $40,617,370 * PVIF(i%, 20)

Using financial calculator:
N = 20
PV = -33712417.10
PMT = 1015434.25
FV = 40617370

I = 3.720%

Semiannual YTM = 3.720%
Annual YTM = 2 * 3.720%
Annual YTM = 7.440%

Before-tax Cost of Debt = 7.440%
After-tax Cost of Debt = 7.440% * (1 - 0.34)
After-tax Cost of Debt = 4.910%

2^nd Issue of Bonds:

Face Value = $62,370,359

Market Value = 92% * $62,370,359
Market Value = $57,380,730.28

Annual Coupon Rate = 6.00%
Semiannual Coupon Rate = 3.00%
Semiannual Coupon = 3.00% * $62,370,359
Semiannual Coupon = $1,871,110.77

Time to Maturity = 20 years
Semiannual Period to Maturity = 40

Let semiannual YTM be i%

$57,380,730.28 = $1,871,110.77 * PVIFA(i%, 40) + $62,370,359 * PVIF(i%, 40)

Using financial calculator:
N = 40
PV = -57380730.28
PMT = 1871110.77
FV = 62370359

I = 3.367%

Semiannual YTM = 3.367%
Annual YTM = 2 * 3.367%
Annual YTM = 6.734%

Before-tax Cost of Debt = 6.734%
After-tax Cost of Debt = 6.734% * (1 - 0.34)
After-tax Cost of Debt = 4.444%

Total Market Value of Debt = Market Value of 1^st Issue of Bonds + Market Value of 2^nd Issue of Bonds
Total Market Value of Debt = $33,712,417.10 + $57,380,730.28
Total Market Value of Debt = $91,093,147.38

Weight of 1^st Issue of Debt = $33,712,417.10 / $91,093,147.38
Weight of 1^st Issue of Debt = 0.37009

Weight of 2^nd Issue of Debt = $57,380,730.28 / $91,093,147.38
Weight of 2^nd Issue of Debt = 0.62991

Estimated After-tax Cost of Debt = 0.37009 * 4.910% + 0.62991 * 4.444%
Estimated After-tax Cost of Debt = 4.616%

Common Stock:

Number of shares outstanding = 5,090,729
Current Price = $34.05

Market Value of Common Stock = 5,090,729 * $34.05
Market Value of Common Stock = $173,339,322.45

Cost of Common Stock = Recent Dividend * (1 + Growth Rate) / Current Price + Growth Rate
Cost of Common Stock = $1.77 * 1.05 / $34.05 + 0.05
Cost of Common Stock = 0.10458 or 10.458%

Market Value of Firm = Market Value of Debt + Market Value of Common Stock
Market Value of Firm = $91,093,147.38 + $173,339,322.45
Market Value of Firm = $264,432,469.83

Weight of Debt = $91,093,147.38 / $264,432,469.83
Weight of Debt = 0.34449

Weight of Common Stock = $173,339,322.45 / $264,432,469.83
Weight of Common Stock = 0.65551

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Common Stock * Cost of Common Stock
WACC = 0.34449 * 4.616% + 0.65551 * 10.458%
WACC = 8.45%