Assignment
Scenario: You have been asked by management of Acme Co. to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm is considering a new investment which it believes will generate an internal rate of return of 13.0%. The market value of Acme's capital structure is as follows:
|
Source of Capital
|
Market Value
|
Weights
|
|
Bonds
|
$35,000,000
|
35.0%
|
|
Preferred Stock
|
$15,000,000
|
15.0%
|
|
Common Stock
|
$50,000,000
|
50.0%
|
|
Total
|
$100,000,000
|
100.0%
|
To finance the investment, Acme has issued 25 year bonds with a $1,000 par value, 4% coupon rate and at a market price of $850. Preferred stock paying a $1.50 annual dividend was sold for $30 per share. Common stock of Acme is currently selling for $60 per share and has a Beta of 1.4. The firm's tax rate is 32%. The expected market return of the S&P 500 is 14% and the 10-Year Treasury note is currently yielding 2.5%.
Determine what discount rate (WACC) should use to evaluate the project.
Assess whether Acme should make the investment.