WACC and Corporate Investment Decisions

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Business Finance

Description

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.
  • Also include a copy of a plagiarism report. A report with more than a 30% plagiarism rate (excluding numbers) will also be considered plagiarized absent something extraordinary.

Format your paper consistent with APA guidelines.

Assignment Steps

Resources: Tutorial help on Excel® and Word functions can be found on the Microsoft®Office website. There are also additional tutorials via the web that offer support for office products.

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.

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Explanation & Answer

Attached.

Running head: WILSON CORPORATION’S CAPITAL FINANCE

Wilson Corporation’s Capital Finance
Names:
Institution:

1

WILSON CORPORATION’S CAPITAL FINANCE
Wilson Corporations capital finance
There are various ways to conduct capital budgeting in a business. One of these ways
is through the weighted average cost of capital (WACC). WACC is a representation of the
average after-tax costs that arise from various sources of company capital (Estrada, 2011). By
using this approach, Wilson Corporation will understand the various costs that either the
sourcing of capital from debt or common stock attracts for the company. To calculate Wilson
Corporation’s WACC, it is important to consider the various weights that constitute the
measure as follows:

WACC =

x Re +

x Rd x (1 – Tc)

In the above formula, Re is the cost of equity, Rd the cost of debt, E the company’s
equity current market value, and D is the current...

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