home / study / business / finance / questions and answers / dinklage corp. has 7 million shares of common stock ... Question: Dinklage Corp. has 7 million shares of common stoc... Bookmark Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $86, 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 $70 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 104 percent of par. The first issue matures in 24 years, the second in 6 years. Suppose the most recent dividend was $5.80 and the dividend growth rate is 7 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 34 percent. What is the companys WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %

Expert Answer Soumyajit Soumyajit answered this Was this answer helpful? 1 0 3,746 answers

cost of equity = 5.8*1.07/86 + 7% = 14.22%

cost of firrst debt = 9.42% (N = 48, FV = 1000, PV = -960 PMT = 45)

cost of second debt = 9.12% (N = 12, FV = 1000, PV = -1040, PT = 50)

Market Value weight cost Olympic Steel 602 0.840782 14.2200 11.95592

Rent a Center 67.2 0.093855 6.2172 0.583514 Lincoln 46.8 0.065363 6.0192 0.393434

Total portfolio 716 12.93287 PS after tax cost fof debt is used WACC = 12.93

I understand that everything in this question is correct. However, I don't understand why the expert who answered this problem chose to use 45 for the first cost of debt payment, and 50 for the second cost of debt payment. could someone please explain this?