Filer Manufacturing has 11.6 million shares of common stock outstanding. The current share price is $50, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a 7 percent coupon, and sells for 91 percent of par. The second issue has a face value of $85.84 million, has a 6.99 percent coupon, and sells for 93.6 percent of par. The first issue matures in 10 years, the second in 6 years.
The most recent dividend was $2.7 and the dividend growth rate is 4.8 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 32 percent. The company's WACC is ???? percent
To calculate the weighted average cost of capital (WACC) for Filer Manufacturing, we need to consider the weights and costs of both equity and debt.
Equity:
The number of shares outstanding is given as 11.6 million, and the current share price is $50. Therefore, the market value of equity (E) can be calculated as:
E = Number of shares * Share price = 11.6 million * $50 = $580 million
Debt:
Filer Manufacturing has two bond issues outstanding, with different face values, coupon rates, and selling prices. We need to calculate the market values of each bond before calculating the weighted average cost of debt.
For the first bond issue:
Face value = $90 million
Coupon rate = 7%
Selling price = 91% of par, which is 0.91 * $100 = $91 (since bond prices are typically quoted as a percentage of par value)
To calculate the market value of the first bond (D1):
D1 = Face value * Selling price = $90 million * $91/100 = $81.9 million
For the second bond issue:
Face value = $85.84 million
Coupon rate = 6.99%
Selling price = 93.6% of par, which is 0.936 * $100 = $93.6
To calculate the market value of the second bond (D2):
D2 = Face value * Selling price = $85.84 million * $93.6/100 = $80.23 million
The total market value of debt (D) can be obtained by summing the market values of both bonds:
D = D1 + D2 = $81.9 million + $80.23 million = $162.13 million
Next, we need to calculate the cost of debt for each bond issue.
For the first bond issue:
The coupon rate is given as 7%, so the coupon payment is 7% of the face value. Since bonds make semiannual payments, the coupon payment per period is 7% / 2 = 3.5%.
The tax rate is given as 32%, so the after-tax cost of debt for the first bond is 3.5% * (1 - 0.32) = 2.38%.
For the second bond issue:
The coupon rate is given as 6.99%, so the coupon payment per period is 6.99% / 2 = 3.495%.
The tax rate is given as 32%, so the after-tax cost of debt for the second bond is 3.495% * (1 - 0.32) = 2.3748%.
Now, we can calculate the weighted average cost of debt (WACC_D) using the market values of each bond as weights:
WACC_D = (D1/D) * Cost of debt for first bond + (D2/D) * Cost of debt for second bond
WACC_D = ($81.9 million/$162.13 million) * 2.38% + ($80.23 million/$162.13 million) * 2.3748%
Finally, we can calculate the WACC by combining the weight and cost of equity with the weight and cost of debt:
WACC = (E / (E + D)) * Cost of equity + (D / (E + D)) * WACC_D
Substituting the values we have derived:
WACC = ($580 million / ($580 million + $162.13 million)) * Cost of equity + ($162.13 million / ($580 million + $162.13 million)) * WACC_D
You may need to provide the Cost of equity to calculate the final WACC.