Question

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $79, and the book value per share is $10. The company also has two bond issues outstanding. The first bond issue has a face value of $120 million, a coupon rate of 4 percent, and sells for 92 percent of par. The second issue has a face value of $105 million, a coupon rate of 3 percent, and sells for 104 percent of par. The first issue matures in 22 years, the second in 7 years. Both bonds make semiannual coupon payments.
The tax rate is 25 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Some information is missing on this question:

I looked for similar questions and they include a recently paid dividend of $4.75 and a growth rate of 5.2%

Answer:

8.97%

Explanation:

total value of equity = $79 x 7,000,000 = $553,000,000

cost of equity:

$79 = $4.997 / (rrr - 5.2%)

rrr - 5.2% = 6.3%

rrr = 11.5%

total value of debt:

$120 million x 0.92 = $110,400,000

YTM = {40 + [(1,000 - 920)/22]} / [(1,000 + 920)/2] = 43.64 / 960 = 4.55%

$105 million x 1.04 = $109,200,000

YTM = {30 + [(1,000 - 1,040)/7]} / [(1,000 + 1,040)/2] = 24.29 / 1,020 = 2.38%

total value of the firm = $553,000,000 + $110,400,000 + $109,200,000 = $772,600,000

equity weight = $553,000,000 / $772,600,000 = 0.7158

debt₁ weight = $110,400,000 / $772,600,000 = 0.1429

debt₂ weight = $109,200,000 / $772,600,000 = 0.1413

WACC = (0.7158 x 11.5%) + (0.1429 x 4.55% x 0.75) + (0.1413 x 2.38% x 0.75) = 8.23% + 0.49% + 0.25% = 8.97%