Question

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $71, 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 $65 million, a yield to maturity of 6.35 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a yield to maturity of 5.83 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 5 years.

Suppose the most recent dividend was $4.30 and the annual dividend growth rate is 5 percent. The tax rate is 35 percent. Calculate the company’s WACC.

Start by calculating the firm's market value. (Enter your answer as a dollar amount, not millions of dollars, i.e., enter one million as 1,000,000).

Firm's Market Value (debt & equity) $_________

Now calculate the firm's cost of equity and after-tax cost of debt. (Enter your answers as percent rounded to two decimals. Assume the YTM's are quoted as an EAR, not an APR). Cost of Equity _______%

After-tax Cost of Debt ________%

Now calculate the WACC. (Don't round your intermediate steps and enter your answer as a percent rounded to two decimals).

WACC ________%

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=71*5000000

=355000000

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*65000*0.96

=62400000

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=1000*45000*1.05

=47250000

MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2

=355000000+62400000+47250000

=464650000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 355000000/464650000

W(E)=0.764

Weight of debt = MV of Bond/MV of firm

Weight of debt = 109650000/464650000

W(D)=0.236

Cost of equity

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

71 = 4.3 * (1+0.05) / (Cost of equity - 0.05)

Cost of equity% = 11.36

Total Debt value = price of Debt1*Shares of Debt1 + price of Debt2*Shares of Debt2

=960*65000+1050*45000

=109650000

Weight of Debt1 = price of Debt1*Shares of Debt1/Total Debt Value

= 62400000/109650000

=0.5691

Weight of Debt2 = price of Debt2*Shares of Debt2/Total Debt Value

= 47250000/109650000

=0.4309

Cost of Debt = Weight of Debt1*Cost of Debt1+Weight of Debt2*Cost of Debt2

Cost of Debt = 6.35*0.5691+5.83*0.4309

Cost of Debt = 6.1259

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 6.1259*(1-0.35)

'= 3.98

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=3.98*0.236+11.36*0.764

WACC =9.62%