Question: Purpose of AssignmentL: Students should understand the mechanics in calculating a company's weighted average cost ofcapital using the capital asset pricing model (CAPM) and its use in making financial investments.
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: You work for an investment banking firm and have been asked by management of VestorCorporation (not real), a software development company, to calculate its weighted average cost ofcapital, to use in evaluating a new company investment. The firm is considering a new investment ina warehousing facility, which it believes will generate an internal rate of return of 11.5%. The marketvalue 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 of 700 words in Microsoft® Word.
- Use Microsoft® Word tables in the presentation if you choose.
- Show all calculations and analysis in the presentation.
- Format your assignment consistent with APA guidelines.
- Click the Assignment Files tab to submit your assignment.