Question

Filer Manufacturing has 5,685,822 shares of common stock outstanding. The current share price is $38.15, and the book value per share is $8.77. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $58,687,458, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $58,030,315, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par.

The most recent dividend was $0.66 and the dividend growth rate is 0.04. 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 0.33.

What is Filer's WACC?

Answer 1

To calculate Filer Manufacturing's weighted average cost of capital (WACC), we need to consider the proportions of equity and debt in the company's capital structure and the costs associated with each.

Step 1: Calculate the market value of equity:

Market Value of Equity = Number of Shares Outstanding × Share Price

Market Value of Equity = 5,685,822 × $38.15

Step 2: Calculate the market value of each bond issue:

Market Value of First Bond Issue = Face Value of Bond Issue × Bond Selling Price

Market Value of Second Bond Issue = Face Value of Bond Issue × Bond Selling Price

Step 3: Calculate the total market value of debt:

Total Market Value of Debt = Market Value of First Bond Issue + Market Value of Second Bond Issue

Step 4: Calculate the weights of equity and debt:

Weight of Equity = Market Value of Equity / (Market Value of Equity + Total Market Value of Debt)

Weight of Debt = Total Market Value of Debt / (Market Value of Equity + Total Market Value of Debt)

Step 5: Calculate the cost of equity using the dividend discount model:

Cost of Equity = (Dividend / Share Price) + Dividend Growth Rate

Cost of Equity = ($0.66 / $38.15) + 0.04

Step 6: Calculate the cost of debt by averaging the costs of the two bond issues:

Cost of Debt = (Coupon Rate × Bond Selling Price) + ((Face Value - Bond Selling Price) / Number of Years to Maturity) / (Face Value + Bond Selling Price) / 2

Step 7: Calculate the weighted average cost of capital (WACC):

WACC = (Weight of Equity × Cost of Equity) + (Weight of Debt × Cost of Debt)

By following these steps and plugging in the given values, you can calculate Filer Manufacturing's WACC.