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Dinklage Corp has 5 million shares of common stock outstanding
Dinklage Corp has 5 million shares of common stock outstanding. The current share price is $77, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $110 million, a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $95 million, a coupon rate of 5 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 9 years. Suppose the most recent dividend was $4.65 and the dividend growth rate is 5.2 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 23 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.) Share on WACC %
Consider the following information for Watson Power Co.: Debt: Common stock: 5,000 7.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. 105,000 shares outstanding, selling for $63 per share; the beta is 1.14. 18,000 shares of 6 percent preferred stock outstanding, currently selling for $105 per share. 8.5 percent market risk premium and 6 percent risk-free rate. Preferred stock: Market: Assume the company's tax rate is 33 percent. Find the WACC.
Expert Solution
| MV of equity=Price of equity*number of shares outstanding |
| MV of equity=77*5000000 |
| =385000000 |
| MV of Bond1=Par value*bonds outstanding*%age of par |
| MV of Bond1=1000*110000*0.94 |
| =103400000 |
| MV of Bond2=Par value*bonds outstanding*%age of par |
| MV of Bond2=1000*95000*1.06 |
| =100700000 |
| MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2 |
| =385000000+103400000+100700000 |
| =589100000 |
| Weight of equity = MV of Equity/MV of firm |
| Weight of equity = 385000000/589100000 |
| W(E)=0.6535 |
| Weight of debt = MV of Bond/MV of firm |
| Weight of debt = 204100000/589100000 |
| W(D)=0.3465 |
| Cost of equity |
| As per DDM |
| Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate) |
| 77 = 4.65 * (1+0.052) / (Cost of equity - 0.052) |
| Cost of equity% = 11.55 |
| Cost of debt |
| Bond1 |
| K = Nx2 |
| Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
| k=1 |
| K =20x2 |
| 940 =∑ [(6*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^20x2 |
| k=1 |
| YTM1 = 6.5421395585 |
| Bond2 |
| K = Nx2 |
| Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
| k=1 |
| K =9x2 |
| 1060 =∑ [(5*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^9x2 |
| k=1 |
| YTM2 = 4.19 |
| Firm cost of debt=YTM1*(MV bond1)/(MV bond1+MV bond2)+YTM2*(MV bond2)/(MV bond1+MV bond2) |
| Firm cost of debt=6.5421395585*(103400000)/(103400000+100700000)+4.19*(103400000)/(103400000+100700000) |
| Firm cost of debt=5.38% |
| After tax cost of debt = cost of debt*(1-tax rate) |
| After tax cost of debt = 5.38*(1-0.23) |
| = 4.1426 |
| WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
| WACC=4.14*0.3465+11.55*0.6535 |
| WACC =8.98% |
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