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Estimating WACC
Dilworth Corp’s balance sheet reflects long-term debt amounting to $800 million. This debt consists of 7% coupon bonds that have 15 years remaining until maturity. The bonds are currently trading for $920 per $1000 face value. The company also has preferred stock outstanding that makes a fixed quarterly dividend payment of $3.50 in perpetuity. The book value of this preferred stock is $180 million, and the par value of each share is $100. Each share of preferred is currently trading for $120. Dilworth has 25 million shares of common stock outstanding, and the current price per share is $48
Investors require a premium of 5.5% over bond yield as inducement to invest in Dilworth common shares. Dilworth’s equity beta is 1.40. The estimated required return on the market portfolio is 10%, and the yield on 10-year Treasuries (proxy for the risk-free rate) is 3%. Dilworth is in steady-state growth (in earnings and dividends). Its per-share annual dividends have increased from $3.00 to $4.00 in the last 8 years, and analysts expect this rate of growth to continue in the foreseeable future. The $4.00 per-share dividend has just been paid out.
Dilworth Corp faces a marginal tax rate of 30%.
Estimate its weighted average cost of capital.
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