Question

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $77, 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 $60 million, a coupon rate of 6 percent, and sells for 97 percent of par. The second issue has a face value of $30 million, a coupon rate of 7 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 4 years.

Suppose the most recent dividend was $4.90 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 40 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

Cost of Equity = Dividend * (1 + Growth rate) / Selling price] + Growth rate

Cost of Equity = 4.90 * (1 + 0.06) / 77] + 0.06

Cost of Equity = 0.0675 + 0.06

Cost of Equity = 12.75%

Computation of WACC:

WACC = Weight of source * Respective After tax cost

WACC = 11.02%

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