Dinklage Corp. has 8 million shaded of common stock outstanding. The current sha
ID: 2751615 • Letter: D
Question
Dinklage Corp. has 8 million shaded of common stock outstanding. The current share price is $80, 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 $76 million, a coupon rate of 9 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a coupon rate of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 7 years. Suppose the most recent dividend was S5.20 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 bends make semiannual payments. The tax rate is 34 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.)Explanation / Answer
Answer: Number of shares outstanding = 8,000,000 Current market price = $80 Book value of the share = $7 Dividend as on date = $5.20 Growth rate in dividends = 8% Therefore by using this information we can get the cost of equity as: Ke = D1/MP + g Here, Ke = Cost of equity D1= Dividend after a year MP = Market price of share g = growth rate in dividends Therefore, Ke = 0.1502 or 15.02% Now Total face value of the equity = $7 x 8 million = $56,000,000 Face value of first debt = $75,000,000 Coupon rate of first debt = 9% Face value of second debt = $45,000,000 Coupon rate of second debt = 10% So total face value of the capital structure = $176,000,000 Hence weight of equity = We = 0.318181818 Weight of first debt = Wd1 = 0.426136364 Weight of second debt = Wd2 = 0.255681818 Now tax rate = 34% Therefore WACC = 0.3182 x 15.02% + 0.4261 x 9% x (1-34%) + 0.25568 x 10% x (1-34%) = 0.089978 or 8.997%