Question

Dani Corporation has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $130 million, a coupon rate of 6 percent, and sells for 92 percent of par. The second issue has a face value of $115 million, a coupon rate of 5 percent, and sells for 103 percent of par. The first issue matures in 24 years, the second in 10 years. Suppose the most recent dividend was $4.85 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. The tax rate is 22 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

The calculation of WACC for Dani Corporation involves finding the costs of equity and debt, weighting them according to the firm's capital structure, and summing them up to determine the firm's overall cost of capital.

Step-by-step explanation:

The question requires the calculation of the Weighted Average Cost of Capital (WACC) for Dani Corporation. WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. To find the WACC, we need to calculate the costs of equity and debt, and then weight them according to the firm's capital structure.

The cost of equity can be estimated using the Dividend Discount Model (DDM), which here would be the most recent dividend of $4.85 growth at 5.2% divided by the current share price of $81 plus the growth rate. The cost of debt would be calculated by finding the yield to maturity on the two bond issues, taking into account the price they sell for, their coupon rate, face value, and time to maturity, and adjusting for a tax rate of 22%.

After calculating the costs of equity and debt, the overall cost of debt must be weighted based on the proportion of each debt issue in the company's capital structure. Lastly, we combine the weighted costs of equity and debt to get the WACC, remembering to express the answer as a percentage.