The Wilson Bat Company has, at market value, $300,000 in bonds and $700,000 in stock outstanding. The coupon rate on the debt, which is currently selling at par, is 7%. The company’s current stock price is $20, with an equity beta of 1.8 and an expected dividend next year of $1.40 which is expected to grow at 6% indefinitely. The company faces a corporate tax rate of 25%.
Wilson is considering purchasing Harrison Balls, Inc. As part of its acquisition research, Wilson has determined that the average beta for ball manufacturers is 1.2. The current risk-free rate is 4%, and the current return on the S&P 500 is 8%.
Calculate Wilson’s WACC. The CFO directs that in calculating this WACC you are to calculate the equity return using the CAPM.
Part Two: If Wilson can expect a return of 9% on its investment in Harrison, should they complete the purchase? Explain?