Calculate WACC (weighted average cost of capital) using the CAPM (capital asset pricing model) to assess whether a company should make an investment
Determine what discount rate (WACC) the company should use to evaluate the investment
- Warehouse facility believes it will generate an internal rate of return of 11.5%
The market value of the company'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
|
What the company used to finance the investment:
- 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 is currently selling for $50 per share and has a beta of 1.2
- Tax rate is 34%
- Expected market return of the S&P 500 is 13%
- 10-Year Treasury note is currently yielding 3.5%