Dinklage Corp. has 5 million shares of common stock outstanding. The current sha
ID: 2717182 • Letter: D
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 coupon rate of 6 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a coupon rate of 7 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 dividend growth rate is 5 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?
Explanation / Answer
Statement showing calculation of WACC
Thus WACC = 0.0966 or 9.66%
Working Notes
1. Calculation of Cost of equity
D0 = 4.30
D1 = 4.30(1+0.05)
= 4.515
re = (D1/P0)+g
= (4.515/71)+0.05
= 0.1136 or 11.36%
2. Calculation of Weighted average cost of Debt
Weighted average cost of debt = ($65/$110)*6% + ($45/$110)*7%
= 6.41%
After tax weighted average cost of debt = 6.41%(1-0.35) = 4.17%
Sorce of finance Amount Weight(w) Cost(c) W*C Common stock $355m 0.7634 0.1136 0.0867 Debt $110m 0.2366 0.0417 0.0099 Total $465m 0.0966