WACC and corporate decision investment, homework help

User Generated

anaplJ

Business Finance

Description

the class to evaluate and calculate a company's weighted average cost of capital and use the analysis to make company investment decisions.

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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.

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: WACC AND CORPORATE DECISION INVESTMENT

WACC And Corporate Decision Investment
Student’s Name
Institution of Affiliation
Date

WACC AND CORPORATE DECISION INVESTMENT

Computation of Weighted Average Cost of Capital
For
Debt,
Post tax

6 (1-

kd

= 0.35)

kd

=

3.90%

For
Equity,
Price

=

D (1+g)
Re - g
2.5

50 =

(1+0.04)
Re -0.04
2.5 X

Re - 0.04 =

1.04
50

Re - 0.04 =

0.052

2

WACC AND CORPORATE DECISION INVESTMENT

Re

=

0.092

ke

=

9.20%

WACC = Wd kd + We ke
Where Wd = weight of debt
We = Weight of Equity
Kd = cost of debt
Ke = Cost of Equity
Source

Weight

Cost

Weight X Cost

Debt

40%

3.90%

1.56%

Equity

60%

9.20%

5.52%

WACC

7.08%

Weighted Average Cost of Capital of Wilson Corporation is 7.08%.

Source

Weight

Cost

Weight X Cost

Debt

60%

3.90%

2.34%

Equity

40%

9.20%

3.68%

WACC

6.02%

Weighted Average Cost of Capital after increasing debts is 6.02%.

3...


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