Assignment: WACC and Corporate Investment Decisions
Purpose :
Students should understand corporate risk and be able to use the financial models to evaluate and calculate a company's weighted average cost of capital and use the analysis to make company investment decisions.
This assignment is designed to align with specific program student learning outcome(s) in your program. Program Student Learning Outcomes are broad statements that describe what students should know and be able to do upon completion of their degree.
Scenario: Wilson Corporation (not real) has a targeted capital structure of 40% long term debt and 60% common stock. The debt is yielding 6% and the corporate tax rate is 35%. The common stock is trading at $50 per share and next year's dividend is $2.50 per share that is growing by 4% per year.
Prepare a minimum 700-word analysis including the following:
Calculate the company's weighted average cost of capital. Use the dividend discount model. Show calculations in Microsoft® Word.
The company's CEO has stated if the company increases the amount of long term debt so the capital structure will be 60% debt and 40% equity, this will lower its WACC. Explain and defend why you agree or disagree. Report how would you advise the CEO.
Format your paper consistent with APA guidelines.