Description
Scenario: You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a software development company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm 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 Vestor's capital structure is as follows:
Source of Capital | Market Value |
Bonds | $10,000,000 |
Preferred Stock | $2,000,000 |
Common Stock | $8,000,000 |
To finance the investment, Vestor has issued 20 year bonds with a $1,000 par 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 Vestor 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%.
Explanation & Answer
Here you go. Please let me know if you have any question.
Outline
Weighted Average Cost of Capital (WACC)
Vestor Corporation’s Capital Structure
Conclusion
Running Head WEIGHTED AVERAGE COST OF CAPITAL
Weighted Average Cost of Capital
Name
FIN/370
Date
Instructor
1
Weighted Average Cost Of Capital
2
Weighted Average Cost of Capital (WACC)
This paper is aimed at evaluating and analyzing its maximum profit potential based on
the WACC. The investment brought before us was intended to provide Vestor Corporation with
an investment opportunity for a warehousing facility.
Our analysis has brought us to the conclusion that this investment would be a solid
addition to Vestor Corporation, potentially generating an Internal Rate of Return (IRR) of 11.5%
that will be helpful in funding this investment. The WACC is involved in evaluating a new
company investment. It is very important that one understands the risks associated with any
investment he or she makes for Vestor Corporation. There is also a need for reviewing the
financial standpoint to ensure the success of this new venture.
Vestor Corporation’s Capital Structure
Capital Structure
$ Value
% Share
Debt
$10,000,000
50%
Equity
$8,000,000
40%
Preferred Stock
$2,000,000
10%
Total
$20,000,000
100%
The discounted rate that Vestor should use to evaluate thei...
