2.99
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In Problem 12, suppose the most recent dividend was $3.85 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. The tax rate is 21 percent. What is the company’s WACC?

Problem 12:

Dani Corp. has 5.5 million shares of common stock outstanding. The current share price is $83, 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 $80 million, a coupon rate of 5.5 percent, and sells for 109 percent of par. The second issue has a face value of $45 million, a coupon rate of 5.8 percent, and sells for 108 percent of par. The first issue matures in 21 years, the second in 6 years. Both bonds make semiannual coupon payments.

a. What are the company’s capital structure weights on a book value basis?

b. What are the company’s capital structure weights on a market value basis? c. Which are more relevant, the book or market value weights? Why?