Question

Filer Manufacturing has 8,136,353 shares of common stock outstanding. The current share price is $26.75, and the book value per share is $5.85. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $48,480,532, has a 0.05 coupon, matures in 10 years and sells for 83 percent of par. The second issue has a face value of $66,060,894, has a 0.06 coupon, matures in 20 years, and sells for 92 percent of par. The most recent dividend was $1.97 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 0.26. What is Filer's aftertax cost of debt? Enter the answer with 4 decimals (e.g. 0.2345)

Answer 1

Filer Manufacturing

Filer's after-tax cost of debt is:

= 4.1440%.

Step-by-step explanation:

a) Data and Calculations:

Outstanding common stock shares = 8,136,353

Current share price = $26.75

Book value per share = $5.85

Tax rate = 0.26

Most recent dividend paid = $1.97 per share

Dividend growth rate = 0.04

Outstanding bond issues:

First Bond Second Bond Total

Face value of issue $48,480,532 $66,060,894 $114,541,426

Selling price 83% of par 92% of par

Sales price $40,238,842 $60,776,022 $101,014,864

Relative sizes 40% 60%

Coupon rate of first bond 0.05 0.06

Weighted average cost of bonds 0.02 0.036

Before-tax cost of bonds = 0.056

After-tax cost of bonds = 0.056 * (1 - 0.26) = 0.04144 = 4.1440%

Maturity period 10 years 20 years