Question

In: Finance

Ten Pins Manufacturing has 8.2 million shares of common stock outstanding. The current share price is...

Ten Pins Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, and the book value per share is $3. The company also has two bond issues outstanding. The first bond issue has a face value of $69.8 million and a coupon rate of 6.9 percent and sells for 108.4 percent of par. The second issue has a face value of $59.8 million and a coupon rate of 7.4 percent and sells for 108.7 percent of par. The first issue matures in 7 years, the second in 28 years.

The company’s stock has a beta of 1.1. The risk-free rate is 3 percent, and the market risk premium is 6.9 percent. Assume that the overall cost of debt is the weighted average implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 34 percent. What is the company’s WACC?

Solutions

Expert Solution

1] Overall cost of debt:
Cost of first bond:
Before tax cost of debt = YTM.
YTM using a financial calculator = 5.44%
After tax cost of first bond = 5.44%*(1-34%) = 3.59%
Cost of second bond:
YTM using a financial calculator = 6.71%
After tax cost of second bond = 6.71%*(1-34%) = 4.43%
Weighted average cost of debt:
Market Value [$ millions] Weight of debt Cost of debt Weighted average cost
First bond [69.8*108.4%] $         75.6632 53.79% 3.59% 1.93%
Second bond [59.8*108.7%] $         65.0026 46.21% 4.43% 2.05%
Total $      140.6658 100.00% 3.98%
Weighted average cost of debt 3.98%
2] Cost of equity per CAPM = risk free rate+beta*market risk premium = 3%+1.1*6.9% = 10.59%
3] CALCULATION OF WACC:
Source of capital Market Value [$ millions] Weight Component cost WACC
Debt $      140.6658 24.81% 3.98% 0.99%
Equity [8.2*52] $      426.4000 75.19% 10.59% 7.96%
Total $      567.0658 100.00% 8.95%
WACC = 8.95%

Related Solutions

Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52,...
Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, 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 $70 million, an 8 percent coupon, and sells for 104 percent of par. The second issue has a face value $50 million, a 7.5 percent coupon, and sells for 97 percent of par. The first issue matures in 10...
Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52,...
Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, and the book value per share is $3. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $69.8 million and a coupon rate of 6.9 percent and sells for 108.4 percent of par. The second issue has a face value of $59.8 million and a coupon rate of 7.4 percent and sells for 108.7 percent of...
Hero Manufacturing has 9 million shares of common stock outstanding. The current share price is $88...
Hero Manufacturing has 9 million shares of common stock outstanding. The current share price is $88 and the book value per share is $7. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $80 million and a coupon of 5 percent and sells for 98 percent of par. The second issue has a face value of $55 million and a coupon of 6 percent and sells for 106 percent...
Filer Manufacturing has 7 million shares of common stock outstanding. The current share price is $86,...
Filer Manufacturing has 7 million shares of common stock outstanding. The current share price is $86, 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 $70 million, has a 9 percent coupon, and sells for 96 percent of par. The second issue has a face value of $45 million, has a 10 percent coupon, and sells for 104 percent of par. The first issue...
Fletcher Manufacturing has 7.5 million shares of common stock outstanding. The current share price is $49...
Fletcher Manufacturing has 7.5 million shares of common stock outstanding. The current share price is $49 and the book value per share is $4. Fletcher Manufacturing also has two bond issues outstanding. The first bond issue has a total face value of $60 million, a coupon rate of 7%, and sells for 93% of par. The second issue has a face value of $50 million, a coupon rate of 6.5%, and sells for 96.5% of par. The first issue matures...
Filer Manufacturing has 5 million shares of common stock outstanding. The current share price is $84,...
Filer Manufacturing has 5 million shares of common stock outstanding. The current share price is $84, and the book value per share is $7. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $60 million, has a 7 percent coupon, and sells for 94 percent of par. The second issue has a face value of $35 million, has a 8 percent coupon, and sells for 107 percent of par. The first issue...
Filer Manufacturing has 10 million shares of common stock outstanding. The current share price is $82,...
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...
Hero Manufacturing has 8.4 million shares of common stock outstanding. The current share price is $78...
Hero Manufacturing has 8.4 million shares of common stock outstanding. The current share price is $78 and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon rate of 6.5 percent and sells for 108.3 percent of par. The second issue has a face value of $50.3 million, a coupon rate of 7.7 percent and sells for 112.1 percent of par. The...
Hero Manufacturing has 8 million shares of common stock outstanding. The current share price is $87...
Hero Manufacturing has 8 million shares of common stock outstanding. The current share price is $87 and the book value per share is $6. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $75 million and a coupon of 10 percent and sells for 97 percent of par. The second issue has a face value of $50 million and a coupon of 11 percent and sells for 105 percent...
Hero Manufacturing has 8.8 million shares of common stock outstanding. The current share price is $74...
Hero Manufacturing has 8.8 million shares of common stock outstanding. The current share price is $74 and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $85 million, a coupon rate of 6.2 percent and sells for 109.1 percent of par. The second issue has a face value of $70.3 million, a coupon rate of 8.1 percent and sells for 112.9 percent of par. The...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT