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 $75, 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 $85 million, a coupon rate of 10 percent, and sells for 96 percent of par. The second issue has a face value of $65 million, a coupon rate of 11 percent, and sells for 109 percent of par. The first issue matures in 25 years, the second in 9 years.

Suppose the most recent dividend was $4.70 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 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.)

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $75, 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 $85 million, a coupon rate of 10 percent, and sells for 96 percent of par. The second issue has a face value of $65 million, a coupon rate of 11 percent, and sells for 109 percent of par. The first issue matures in 25 years, the second in 9 years.

Suppose the most recent dividend was $4.70 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 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

Ans. 1)First, we will find the cost of equity. The information provided allows us to solve for the cost of equity using the dividend growth model:

RE = D0(1+g)/P0+ g= $4.70(1+0.06)/$75+0.06 =$4.982/$75+0.06=0.0664+0.0600= 0.1264 or 12.64%.

2) Next we need to find the YTM on both bond issues:

Bond issue 1 = Face 85 million$, Coupan rate10%, market price 96%, 25yr term.
Market value 81.6million$,Annual interest paid (85million$*10/100)=85,00,000$. After tax interest paid =85,00,000$x 66% = 56,10,000. net after tax cost = 56,10,000$/81.6mil = 6.88%

Bond issue 2 = Face 65 million$, Coupan rate11%, market price 109%, 9 yr term.
Market value million$70.85,Annual interest paid (65million$*11/100)=$7,150,000. After tax interest paid =)=$7,150,000x 66% =4719,000$ . net after tax cost = 4719,000$ /$70.85mil= 6.66%

3) To calculate the weighted average cost of debt, we need to determine the market value weight of each bond issue and equity.

Market Value of Equity= 9,000,000 shares * 75$ per share=675,000,000$

Market Value of Bond =85,000,000$*96%+65,000,000*109%=81,600,000$+70,850,000$=152,450,000$

The market value of Dinklage Corp is the sum of the market value of equity and market value of debt

V =675,000,000$+152,450,000$=827,450,000$

4) The market value weights of equity and debt are:

E/V= 675,000,000$/827,450,000$=81.58%

D/V=152,450,000$/827,450,000$=18.42%

5) To calculate the weighted average cost of debt, we need to determine the market value weight of each bond issue. The market value weight of the first bond issue is the market value of bond issue 1 divided by the sum of market value of bond issue 1 and bond issue 2. We already know that the market value of both bond issues is $140,200,000. Therefore:

Bond 1= 81,600,000$/152,450,000$=53.53%

Bond 2= 70,850,000$/152,450,000$=46.47%

The post-tax weighted average cost of debt is:

Bond (6.88*0.5353+6.66*0.4647)=6.78%

Using the WACC equation= WERE+WDRD(1-TC)=(0.8158.*12.64)+ (0.1842*6.78)= 11.56%

Company’s WACC is 11.56%

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