Assignment
Steps
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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%.
Determinewhat discount rate (WACC) Vestor should use to
evaluate the warehousing facility project.
Assesswhether Vestor should make the warehouse
investment.
Prepareyour analysis in a minimum of
250 words in Microsoft®Word.
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