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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...

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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Dear Student, Please... View the full answer

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Solution-a
The book value of equity is the book value per share times the number of shares, and the
book value of debt is the face value of the company’s debt, so:
Equity = 8,300,000($4) =...

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