Dinklage Corp. has 5 million shares of common stock outstanding. The current sha
ID: 2718736 • Letter: D
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, a coupon rate of 7 percent, and sells for 94 percent of par. The second issue has a face value of $35 million, a coupon rate of 8 percent, and sells for 107 percent of par. The first issue matures in 22 years, the second in 4 years. Suppose the most recent dividend was $5.60 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?
Explanation / Answer
Stock Value P0= 84 current dividend d0 5.60 Expected return k 0 Dividend growth rate =g= 8% By Gordon's model P0=d0(1+g)/(k-g) 84=5.6*1.08/(k-0.08) 84k-6.72=6.048 k=0.152 k= 15.2% Required rate of return for common stock =15.2% YTM formula = {Interest payment+(Face value-Market price)/Years to maturity}/(face value+2*market price)/3 Details Bond 1 Bond 2 Total Face value 60,000,000 35,000,000 Market Price 56,400,000 37,450,000 93,850,000 Annual Interest 4,200,000 2,800,000 Years to maturity 22 4 YTM =[4200000+(60000000-56400000)/22]/(60000000+2*56400000)/3 =[2800000+(35000000-37450000)/4]/(35000000+2*37450000)/3 = 7.58% 6.0% Tax Rate 35% 35% Post Tax YTM 4.9% 3.9% Bond Value weightage 60.10% 39.90% Average cost of Debt =0.6010*0.049+0.3990*0.039 = 4.51% details Market Value % weight in value Cost Equity 420,000,000 81.74% 15.2% Bonds 93,850,000 18.26% 4.51% Total 513,850,000 WACC = 0.8174*0.1520+0.1826*0.0451 = 13.25% So WACC of company =13.25%