Assignment: Report Issue
Part 1 of Assignment -
Assignment Steps
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 you would advise the CEO.
Format your paper consistent with APA guidelines.
Part 2 of assignment -
Answer each question with Knowledge and 100+ words answers. If citing please show references.
1 - What are the differences between systematic and nonsystematic risk?
2- Cost of Capital - I have to admit when I started facilitating this class I had never heard of the WACC formula before. But now that it's been awhile it really surprises how much I utilize this for projects at work. Had you ever heard of the WACC formula previously?
3 - Using Net Present Value - How would you go about estimating the Net Present Value (NPV) of a college education by estimating the future earning with and without a college education. Please show an example. What is the relationship between Net Present Value (NPV) and Profitability Index (PI)?
4 - How do increases in debt affect the weighted average cost of capital?
5 - How does dividend policy affect the growth of a firm?
6 - What are some of the other ways that a company can diversify its business?
Part 3 of assignment -
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:
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Source of Capital
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Market Value
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Bonds
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$10,000,000
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Preferred Stock
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$2,000,000
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Common Stock
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$8,000,000
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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 100+ words in Microsoft Word.