WACC and Corporate Investment Decisions

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Business Finance

Description

Purpose of Assignment

Students should understand corporate risk and be able to use the financial models learned in 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

Hello buddy🙋 , check on the attached file below for the for the solution, kindly review and check whether I have followed all your requirements and if you find any issue that needs to be reviewed, kindly respond to me as soon as you can and I am always available to further help you📖 👍 , I will always ensure you are satisfied at the end.Note that i may be located in a different time zone, therefore in case i delay to respond to your clarification give 4-6 hours, thanks.Thanks and all the best in your studies buddy✅

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Solution
From the given scenario ofWilson Corporationthat has some source of capital and given
figures as;
Market Value
Long term debt = 40%
Common Stock = 60%
Debt yield = 6%
Corporate tax = 35%
Common Stock trading = $50 per share
Next year's dividend = $2.50 per share
Dividend growing by 4% per year
Therefore, one can easily get the portion of equity and debt from given values i.e.
Weight of Debt = 40%
Weight of Equity (common stock) = 60%

Using dividend discount model ...


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