Dinklage Corp. has 7 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $79, 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 $70 million, a coupon rate of 8 percent, and sells for 94 percent of par. The second issue has a face value of $40 million, a coupon rate of 9 percent, and sells for 107 percent of par. The first issue matures in 23 years, the second in 6 years. Suppose the most recent dividend was $5.10 and the dividend growth rate is 9 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 34 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   Given : Bond 1 Bond Par Value           70,000,000 Market Price@94           65,800,000 Years to Maturity                           23 Annual Interest @8%=             5,600,000 YTM = [5600000+(70000000-65800000)/23]/(70000000+65800000*2)/3 YTM =8.61% Tax rate =34% Post Tax cost of debt =8.61%*(1-34%)= 5.68% Given : Bond 2 Bond Par Value           40,000,000 Market Price@107           42,800,000 Years to Maturity                              6 Annual Interest @9%=             3,600,000 YTM =[3600000+(40000000-42800000)/6]/(40000000+42800000*2)/3 YTM is 7.51% approx Tax rate =34% Post Tax cost of debt =7.51%*(1-34%)= 4.96% Weighted cost of Debt Market Value Wt of MV Post Tax cost Wtd cost Bond 1           65,800,000 60.59% 5.68% 3.44% Bond 2           42,800,000 39.41% 4.96% 1.95%        108,600,000 5.40% . So weighted cost of Debt =5.4% Cost of Equity Shares outstanding             7,000,000 Current share price                           79 Market value of Equity        553,000,000 Recent Dividend =D0=5.1 Div growth rate g=9% Assume cost of equity =k so 79=5.1*1.09/(k-0.09) 79k-7.110=5.559 k=16.04% So cost of Equity =16.04% WACC calculation Type of Capital Market Value Wt of MV Post Tax cost Wtd cost Debt        108,600,000 16.41% 5.40% 0.89% Equity        553,000,000 83.59% 16.40% 13.71% Total        661,600,000 14.59%

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