Filer Manufacturing has 8.3 million shares of common stock outstanding. The current share price is $53, 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 $70 million and a coupon rate of 7% and sells for 108.3% of par. The second issue has a face value of $60 million and a coupon rate of 7.5 % and sells for 108.9% of par. The first issue matures in 8 years, the second in 27 years.
a) What are Filer’s capital structure weights on a book value basis?
b) What are Filer’s capital structure weights on a market value basis?
c) Which are more relevant, the book value of the market value weights? Why?
d) Suppose the company’s stock has a beta of 1.2. The risk-free rate is 3.1%, and the market risk premium is 7%. Assume that the overall cost of debt is the weighted average implined by the two outstanding debt issues. Both bonds make semiannual payments and the tax rate is 35%. Given this information, what is the company’s WACC?
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