04 May Capital_budgeting
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 you would advise the CEO.
Format your paper consistent with APA guidelines.
Part 2 of assignment –
Answer each question with Knowledge and 100+ words answers. If citing please show references.
1 – What are the differences between systematic and nonsystematic risk?
2- Cost of Capital – I have to admit when I started facilitating this class I had never heard of the WACC formula before. But now that it’s been awhile it really surprises how much I utilize this for projects at work. Had you ever heard of the WACC formula previously?
3 – Using Net Present Value – How would you go about estimating the Net Present Value (NPV) of a college education by estimating the future earning with and without a college education. Please show an example. What is the relationship between Net Present Value (NPV) and Profitability Index (PI)?
4 – How do increases in debt affect the weighted average cost of capital?
5 – How does dividend policy affect the growth of a firm?
6 – What are some of the other ways that a company can diversify its business?
Part 3 of assignment –
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%.
Determine what discount rate (WACC) Vestor should use to evaluate the warehousing facility project.
Assess whether Vestor should make the warehouse investment.
Prepare your analysis in a minimum 100+ words in Microsoft® Word.
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