Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $85, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon rate of 8 percent, and sells for 95 percent of par. The second issu a face value of $40 million, a coupon rate of 9 percent, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years. Suppose the most recent dividend was $5.70 and the dividend growth rate is 4 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.) WACC

Answer 1

Price D1/(ke-g) $85.00 4.00% g= $5.93 D1 5.7*1.04 Кe-g3 0.0697 Кe 3 10.97% Cost of equity 10.97% RATE(23 2,1000*0.08/2,-950,1000) 2*(1-0.38) After tax cost of First issue: 5.27% RATE(5*2,1000 0.09/2,-1080,1000) 2*(1-0.38) 4.39% After tax cost of second issue: weight (amount/total) Market value weight x ytm Particulars amount [million ] After tax cost of debt $61.75 first issue 5.27% 0.03100 0.5884 $43.20 second issue 4.39% 0.4116 0.01805 $104.95 Total 4.91% After tax of debt Market value[million] weighted cost Particulars weight cost $510.00 Equity 10.97% 0.8293 0.091012 $104.95 Debt 0.1707 4.91% 0.008371 9.94% WACC $614.95