P14-13 Calculating the WACC [LO3] Filer Manufacturing has 4 million shares of co

Question

P14-13 Calculating the WACC [LO3]

Filer Manufacturing has 4 million shares of common stock outstanding. The current share price is $70, 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 $60 million, has a 5 percent coupon, and sells for 95 percent of par. The second issue has a face value of $40 million, has a 6 percent coupon, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years.

  

The most recent dividend was $4.2 and the dividend growth rate is 4 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 38 percent.

   

which of the following is the correct answer:

8.41%

5.41%

4.89%

10.3%

5.15%

Filer Manufacturing has 4 million shares of common stock outstanding. The current share price is $70, 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 $60 million, has a 5 percent coupon, and sells for 95 percent of par. The second issue has a face value of $40 million, has a 6 percent coupon, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years.

Explanation / Answer

The correct answer should be 8.41% ( Closest to my calculations as follows)

WACC based on market value weights":

Weighted average cost of capital is 8.45%

* 70 = 4.2 x 1.04 / R- 0.04 or R = 10.24%

** 0.05 x ( 1-0.38) = 0.031

*** 0.06 x (1-0.38) = 0.0372

Source of capital Market values Market value weights Specific cost of capital Weighted costs of capital Equity 280 0.7395 0.1024* 0.0757 Debt 1 57 0.1506 0.031** 0.0047 Debt 2 41.60 0.1099 0.0372*** 0.0041 378.60 1.000 0.0845

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