Calculating the WACC with explanation PLEASE!! Filer Manufacturing has 9.3 milli
ID: 2633873 • Letter: C
Question
Calculating the WACC
with explanation PLEASE!!
Filer Manufacturing has 9.3 million shares of common stock outstanding. The current share price is $63. and the book value per share is $6. Filer manufacturing also has two bond issues outstanding. The first bond issue has a face value of $72 million and a coupon rate of 8 percent and sells for 107.3 percent of par. The second issue has a face value of $62 million and a coupon rate of 8.6 percent and sells for 110.9 percent of par The first issue matures in 9 years, the second in 26 years. The company?s stock has a beta of 1.3. The risk-free rate is 4.1 percent, and the market risk premium is 8 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 40 percent. What is the company?s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) WACC %Explanation / Answer
BONDS:
First Bond.
Let the Yield to Maturity of First Bond be i%.
Thus,
107.3 = 8/2*PVIFA(i%,9*2) + 100*PVIF(i%,9)
On solving we get i= 7.02%
Market Value of Bonds issued = 107.3%*72,000,000 = $77,256,000
Second Bond
Let the Yield to Maturity of First Bond be i%.
Thus,
110.9 = 8.5/2*PVIFA(i%,26*2) + 100*PVIF(i%,26)
On solving we get i= 7.68%
Market Value of Bonds issued = 110.9%*62,000,000 = $68,758,000
Weighted Average cost of Debt = (77.256M*7.02% + 68.758M*7.68%)/(77.256M + 68.758M) = 7.33%
Total Market Value = $146,014,000
COMMON STOCK
Cost of Stock = Risk Free Rate + Beta*Risk Premium
= 4.1 + 1.3*8 = 14.5%
Market Value of Common Stock = 63*9,300,000 = $585,900,000
WACC = Proportion of each fund * Cost of fund
(146,014,000*7.33%*(1-40%) + 585,900,000*14.5%)/(146,014,000 + 585,900,000)
= 12.49%
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