Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $68, and the book value per share is $8. The company also has two bond issues outstandingSuppose the most recent dividend was "$3.25" and the dividend growth rate is 5 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 21 percent. What is the company’s WACC?

"The first bond issue has a face value of $70 million, a coupon rate of 6 percent, and sells for 97 percent of par. The second issue has a face value of $40 million, a coupon rate of 6.5 percent, and sells for 108 percent of par. The first issue matures in 21 years, the second in 6 years."

In order to calculate WACC we must first determine the YTM and market values of the 2 bonds.

bond 1:

market value = $70,000,000 x 0.97 = $67,900,000

YTM = {4,200,000 + [(70,000,000 - 67,900,000)/21]} / [(70,000,000 + 67,900,000)/2] = 4,300,000 / 68,950,000 = 6.24%

bond 2:

market value = $40,000,000 x 1.08 = $43,200,000

YTM = {2,600,000 + [(40,000,000 - 43,200,000)/6]} / [(40,000,000 + 43,200,000)/2] = 2,066,667 / 41,600,000 = 4.97%

weighted average cost of debt:

total value of debt = $67,900,000 + $43,200,000 = $111,100,000

weighted average cost = [($67,900,000/$111,100,000) x 6.24%] + [($43,200,000/$111,100,000) x 4.97%] = 3.814% + 1.933% = 5.75%

cost of equity (Re):

$68 = ($8 x 1.05) / (Re - 5%)

Re - 5% = $8.40 / $68 = 12.35%

Re = 17.35%

outstanding stock's market value = 7,000,000 x $68 = $476,000,000

WACC = [($476,000,000/$587,100,000) x 17.35%] + [($111,100,000/$587,100,000) x 5.75% x 0.79] = 14.07% + 1.01% = 15.08%