Business Finance
FIN370 Phoenix Wilson Corporation WACC and Corporate Investment Analysis

FIN370

University of Phoenix

Question Description

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 would you advise the CEO.

Format your paper consistent with APA guidelines.

Final Answer

Attached.

Running head: WILSON COMPANY WACC

Wilson Company WACC
Name
University

1

WILSON COMPANY WACC

2
Wilson Company WACC

Wilson Corporation presents a capital structure of 40% long-term debt and 60% common
stock. The debt of the company yields 6%, while the corporate tax rate is 35%. Additionally,
common stock is trading at $50 per share and the dividend for next year will be $2.50 per share
and growing at 4 percent per year. The company’s weighted average cost of capital using the
dividend discount model is as follows:
Cost of Equity Capital = (Expected Dividend per share/Price per share of stock) + Growth
= (250/50) +0.04
=0.05 +0.04 = 0.09 or 9%
Cost of debt = 6 * (1-0.35)== 6 *0.65 = 3.90%
WACC = weight of debt * cost of debt + weight of equity *cost of equity
= .40*3.9+.60*9 = 6.96%
The current weighted average cost of capital is 6.96%. The cost of equity capital must...

Mrr426 (397)
University of Maryland

Anonymous
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Anonymous
Thanks as always for the good work!

Anonymous
Excellent job

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