Question

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $79, and the book value per share is $10. The company also has two bond issues outstanding. The first bond issue has a face value of $120 million, a coupon rate of 4 percent, and sells for 92 percent of par. The second issue has a face value of $105 million, a coupon rate of 3 percent, and sells for 104 percent of par. The first issue matures in 22 years, the second in 7 years. Suppose the most recent dividend was $4.75 and the dividend growth rate is 5.2 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 25 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Cost of common stock
=	D1/P0 + g
	4.75(1+.052)/79 + 5.2%
	11.53%
Market Value of common stock	7 Mn x $79 =	$ 553,000,000
Cost of 1 bond issue
FV	120	Million
PV	110.4	Million	(120 x 92%)
PMT	2.4	Million	(120 x 4%/2)
NPER	44		(22 x 2)
Rate	4.58%
	=RATE(44,2.4,-110.4,120)*2
After Tax cost	4.58% x (1-25%)	3.44%
Market Value of 1 bond	110.4	Million
Cost of 2 bond issue
FV	105	Million
PV	109.2	Million	(105 x 104%)
PMT	1.575	Million	(105 x 3%/2)
NPER	14		(7 x 2)
Rate	2.38%
	=RATE(14,1.575,-109.2,105)*2
After Tax cost	2.38% x (1-25%)	1.79%
Market Value of 2 bond	109.2	Million
Total Market Value		Weight
Common Stock	553	0.7158
1 Bond	110.4	0.1429
2 Bond	109.2	0.1413
	772.6
WACC = W equity x Cost Equity + W bond 1 x Cost bond 1 + W bond 2 x Cost bond 2
0.7158 x 11.53% + 0.1429 x 3.44% + 0.1413 x 1.79%
9.00%	WACC