Dinklage Corp. has 9 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $88, 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 $80 million, a coupon rate of 5 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3   Bond 1 Bond face value            80,000,000 Current Bond Price@98%            78,400,000 Annual Ineterst@5%               4,000,000 Years to Maturity                               20 YTM =[4000000+(8000000-78400000)/20]/(80000000+2*78400000)/3 YTM =5.16% Tax rate =38% So Post tax cost of debt=5.16%*(1-0.38)= 3.20% Bond 2. Bond face value            55,000,000 Current Bond Price@106%            58,300,000 Annual Ineterst@6%               3,300,000 Years to Maturity                                 8 YTM =5.07% Post Tax cost of debt=5.07%*(1-0.38)= 3.14% Wtd avg cost of debt Market value % wt post tax cost Wtd cost Bond 1            78,400,000 57.35% 3.20% 1.83% Bond 2            58,300,000 42.65% 3.14% 1.34% Total          136,700,000 3.18% So weigted cost of debts =3.18% Equity Market Price =P0=88 Recent dividend =D0=6 Dividend growth rate =8% Assume cost of equity =k So P0=D(1+g)/(k-g) 88=6*1.08/(k-0.08) 88k-7.0400=6.48 k=15.36% So cost of equity =15.36% Shares outstanding                 9,000,000 Value of Equity =          792,000,000 WACC Capital Type Market Value % wt Post Tax cost Wtd Cost Equity          792,000,000 85.28% 15.36% 13.10% Debt          136,700,000 14.72% 3.18% 0.47% Total          928,700,000 13.57% So WACC =13.57%

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