Dinklage Corp. has 8 million shares of common stock outstanding. The current sha
ID: 2717875 • Letter: D
Question
Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon rate of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon rate of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 years. Suppose the most recent dividend was $5.90 and the dividend growth rate is 7 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %
Explanation / Answer
cost of equity = dividend (d1) / price of share(P0) + Growth g)
= d1/p0 + g, where d1 = do +growth
= [5.90(1+.07)] / 87 + .07
= 6.313/87 +.07 = 14.26%
Bond 1, face value = 75 M, coupon rate = 10%
cost of debt = [interest*(1- tax rate) + (Redeemable value - market price)/ no. of years to maturity] / (Redeemable value + market price) /2
= {7.5(1- .35) + [(75*97%)-75/ 25]} / (72.75+75)/2
= 6.48%
Bond 2, face value = 50M, coupon rate = 11%
cost of debt = [interest*(1- tax rate) + (Redeemable value - market price)/ no. of years to maturity] / (Redeemable value + market price) /2
= {5.5(1- .35) + [(50*105%)-50/ 7]} / (52.5+50)/2
= 7.67%
Total share outstanding = 8M *6 =48M
Bond1 = 75M
Bond2 = 50M
Total capital employed = 48m+75m+50m = 173m
Weight of equity = 48/173 = .28
Weight of Bond 1 = 75/173 = .43
Weight of Bond 2 = 50/173 = .29
WACC % = (0.28* 14.26 + 0.43* 6.48 + .29 * 7.67) = 9%
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