Weighted Average Cost of Capital, business and finance homework help

 

 

Students should understand the mechanics in calculating a company’s weighted average cost of capital using the capital asset pricing model (CAPM) and its use in making financial investments.

Assignment Steps

Resources: Tutorial help on Excel^® and Word functions can be found on the Microsoft^®Office website. There are also additional tutorials via the web that offer support for office products.

Scenario: You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a software development company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm is considering a new investment in a warehousing facility, which it believes will generate an internal rate of return of 11.5%. The market value of Vestor’s capital structure is as follows:

Source of Capital	Market Value
Bonds	$10,000,000
Preferred Stock	$2,000,000
Common Stock	$8,000,000

To finance the investment, Vestor has issued 20 year bonds with a $1,000 par value, 6% coupon rate and at a market price of $950. Preferred stock paying a $2.50 annual dividend was sold for $25 per share. Common stock of Vestor is currently selling for $50 per share and has a Beta of 1.2. The firm’s tax rate is 34%. The expected market return of the S&P 500 is 13% and the 10-Year Treasury note is currently yielding 3.5%.

Determine what discount rate (WACC) Vestor should use to evaluate the warehousing facility project.

Assess whether Vestor should make the warehouse investment.

Prepare your analysis in a minimum of 700 words in Microsoft^® Word.

Use Microsoft^® Word tables in the presentation if you choose.

Show all calculations and analysis in the presentation.

Format your assignment consistent with APA guidelines