Weighted Average Cost of Capital (Corporate Finance), business and finance homework help

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Please see attached requirements for writing an analysis of the described company situation. The focus is on weighted average cost of capital.

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Weighted Average Cost of Capital Objective: To demonstrate the steps in calculating a company’s weighted average cost of capital using the capital asset pricing model (CAPM) and its use in making financial investments. Steps to completing this analysis: The situation: You have been asked by management of Premier Corporation (a fictional company), a software development company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. Premier 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 Premier’s capital structure is as follows: Source of Capital Bonds Preferred Stock Common Stock Market Value \$10,000,000 \$2,000,000 \$8,000,000 To finance this investment, Premier has issued 20 year bonds with a \$1,000 per 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 Premier 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%. You must use the above information to write an analysis that includes the following: 1. Determine what discount rate (WACC) Premier should use to evaluate the warehousing facility project. 2. Assess whether Premier should make the warehouse investment. 3. Show all calculations and analysis in the presentation. 4. Incorporate Microsoft Word tables when appropriate. 5. Analysis should be a minimum of 900 words. 6. Cite all works that you used. [For reference, this class is using the 11th edition of Fundamentals of Corporate Finance by Ross, Westerfield, and Jordan (2016)] ...
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Outline
Weighted average cost of capital.
Introduction
Calculation of weights
Calculation of the cost of capital of the various sources of capital
a) Cost of equity
b) Cost of preferred stock
c) Cost of debt
Calculation of WACC
Decision

1

Student’s name
Professor name
Course
Date
Weighted Average Cost of Capital
Introduction
The weighted average cost of capital represent the overall cost of capital of a firm from using the
various sources of finance. Ideally, a firm uses finances from multiple sources such as equity,
debt, preferred stock, etc. All these sources attract various costs and the computation of WACC
shows the combined effect of these sources of capital. Therefore, weighted average cost of
capital is the average rate of return in a firm from using various sources of capital. In the
calculation of WACC, the respective proportions of the various sources of capital are computed
to get the weights attached to every source of capital (Richard et.al, 2016). The weights are
multiplied with the respective cost of capital of each source and the result aggregated to get the
overall cost of capital.
The formula for calculation of WACC is given by the following formula:

D
P
E
WACC = K d   + K p   + K e  
V 
V 
V 

Where
WACC is the weighted average cost of capital
Kd is the cost of debt
Kp is the cost of preference shares
Ke is the cost of equity

2

D,

P,

E

is the proportions (weights) of debt, preferred stocks

V

V

V

and equity in capital structure

In the case given for Premier, the firm uses debt, equity and preferred stock in its capital structure.
The calculation of WACC will involve calculating the weights attached to each of these sources of
capital, calculating the cost of capital of each source and finally computation of the weighted
average cost of capital.
Calculation of weights
Weights are the proportions of each of the source of capital employed in the firm. The computation
of the weights is shown below:

Source

Value

Weights

Equity (Common stock)

8,000,000

8,000,000

Debt (bonds

10,000,000

10,000,000

Preferred stock

2,000,000

2,000,000

Total

20,000,000

20,000,00...

FrankRose23 (2386)
UCLA
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