Dinklage Corp. has 4 million shares of common stock outstanding. The current sha
ID: 2751914 • Letter: D
Question
Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $60 million, a coupon rate of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon rate of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years.
Suppose the most recent dividend was $4.20 and the dividend growth rate is 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 38 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.
Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $60 million, a coupon rate of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon rate of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years.
Suppose the most recent dividend was $4.20 and the dividend growth rate is 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 38 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
Price = recent dividend* ( 1 + growth rate )/( cost of equity - growth rate)
70= 4.2 * (1 + .04)/(cost of equity - 0.04)
= 10.24%
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM1/2)^k] + Par value/(1 + YTM1/2)^(Nx2)
k=1
K= 20x2
950 = [(5*1000/(100*2))/(1 + YTM1/200)^k] + 1000/(1 + YTM1/200)^20x2
k=1
YTM1 = 5.4123%
Bond 2
K= 4x2
1040 = [(6*1000/(100*2))/(1 + YTM2/200)^k] + 1000/(1 + YTM2/200)^4x2
k=1
YTM2 = 4.8869
Cost of debt = market value of bond 1*YTM1/(MV of bond 1 + MV of bond 2)+MV of bond 2*YTM2/(MV of bond 1 + MV of bond 2)
= 0.95*60*5.4123/(.95*60+1.04*40)+1.04*40*4.8869/(.95*60+1.04*40) = 5.19%
Total MV of debt = (.95*60+1.04*40) = 98.6m
Total MV of equity = 70*4m = 280m
WACC = wd(rd)(1 – T) + wc(rs) = 98.6/(98.6+280)*5.19*(1-0.38)+280/(98.6+280)*10.24 = 8.41%