Dinklage Corp. has 6 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $72, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, a coupon rate of 7 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon rate of 8 percent, and sells for 106 percent of par. The first issue matures in 22 years, the second in 6 years. Suppose the most recent dividend was $4.40 and the dividend growth rate is 6 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 35 percent. What is the company’s WACC?

Explanation / Answer

I am answering for the similar question. Just values are differing . please refer this

Erna Corp. has 9 million shares of common stock outstanding. The current share price is $88, and the book value per share is $7. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $80 million, has a coupon rate of 5 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, has a coupon rate of 6 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 8 years.

Suppose the most recent dividend was $6.00 and the dividend growth rate is 8 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. What is the company’s WACC?

Answer

he Required Rate of Return on Common = Next Div/ Price + G%, or 6.48 (6.00 + 8%) / 88 = 7.4% + 8% = 15.4%.

Bond #1 pays 5%, or 4.0 mil less 38%, or 2,480,000 on a market value of 78.4 mil, or 3.16%.

Bond #2 pays 6%, or 3.3 mil less 38%, or 2,046,000 on a market value of 58.3 mil, or 3.51%.

Common's market value is 9.0 mil x 88, or 792.0 mil at a cost of 15.4%.

WACC -
Bond # 1 - 78.4 mil costs 3.16%, or 2.480 mil
Bond # 2 - 58.3 mil costs 3.51%, or 2.046 mil
Common - 792.0 mil costs 15.4%, or 121.968 mil
Total Capital 928.7 mil costs 126.494, or 13.6%

WACC -
8.4% costs 3.16%, or .265%
6.3% costs 3.51%, or .22%
85.3% costs 15.4%, or 13.14%
Total WACC = 13.6%

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