Question

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $69, 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 $70 million, a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $55 million, a coupon rate of 5 percent, and sells for 106 percent of par. The first issue matures in 24 years, the second in 9 years.

Suppose the most recent dividend was $4.25 and the dividend growth rate is 4.4 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 25 percent. What is the company’s WACC?

Answer 1

1		Market value	Weight		Book value	Weights
2	Enquity	$ 621,000,000	0.8334	Enquity	$ 72,000,000	0.3655
3		=9000000*69			=9000000*8
4
5	Total debt	$    124,1000,000	0.1666	Total debt	$ 125,000,000	0.6345
6
7
8	Total	$    745,100,000	1.0000	Total	$ 197,000,000	1.0000
9
10		Market value
11	Debt1	$   65,800,000		Debt 1	$ 70,000,000
12		=70000000*94%
13
14	Debt2	$ 58,300,000		Debt 2	$ 55,000,000
15		=55000000*106%
16
17	total	$ 124,100,000		Total	$ 125,000,000