Question

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $84, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $60 million, has a 7 percent coupon, and sells for 94 percent of par. The second issue has a face value of $35 million, has a 8 percent coupon, and sells for 107 percent of par. The first issue matures in 22 years, the second in 4 years. The most recent dividend was $5.6 and the dividend growth rate is 8 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 35 percent. What is the company's WACC?

Answer #1

After tax cost of first bond = 7% (1-.35) = 4.55%

After tax cost of second bond = 8% (1 - .35) = 5.2%

Cost of equity = D1/P0 +g

D1 = dividend after 1 year = $5.6 (1.08) = $6.048

g= 8%

p0 = $84

Cost of equity = 6.048/84 + .08 = .072 + .08 = .152 = 15.2%

Market Value of equity = 5 million * $84 = $420 million

Market Value of first bond = $60 million * 94% = $56.40 million

Market Value of second bond = $35 million * 107% = $37.45 million

Total Market Value = $420 million + $56.40 million + $37.45 million = $513.85 million

**WACC = (15.2%*420/513.85) + (4.5% * 56.40 / 513.85) +
(5.2% * 37.45/513.45) = 12.43% + .494% + .379% =
13.31%**

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