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:
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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 700 words in Microsoft® Word. Discount will not apply to word-count criterion when total words submitted is below 750 words including title page, reference page and charts.