weighted average cost of capital 17

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Purpose of Assignment

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

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.

Add ( Introduction and Conclusion)

(Paragraph) Calculate Weighted Investment for Vestor

(Paragraph) Cost of Capital for Vestor

What Discount Rate Should Vestor use and why? Comparing the calculations

Show all Calculations and fomulas for the Cost of Capital, Calculate Weighted Investment, Calculate an appropiate discount rate

Show all calculations in excel file first, then add them into the word document with the rest of the report and submit both files (Excel & Word).

Reference and in-text citations within your answers according to the reference used.

Use Microsoft® Word tables .

Show all calculations, formulas and analysis in the word document.

Format your assignment consistent with APA guidelines.

Click the Assignment Files tab to submit your assignment.

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