FIN370 Phoenix Wilson Corporation WACC and Corporate Investment Analysis

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iybcrm2005

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FIN370

University of Phoenix

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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.

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Explanation & Answer

Attached.

Running head: WILSON COMPANY WACC

Wilson Company WACC
Name
University

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WILSON COMPANY WACC

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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...

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