Class Assignment 1J

Weighted Average Cost of CapitalPurpose of AssignmentStudents should understand the mechanics in calculating a company’s weighted average cost of capital using the capital asset pricing model (CAPM) and its use in making financial investments.Assignment StepsResources: 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 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 CapitalMarket ValueBonds$10,000,000Preferred Stock$2,000,000Common Stock$8,000,000To 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.Please No Plagiarism at least 10 % below
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Scenario: Scenario: You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a softwa
company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm is considering a new inve
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 follo
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
$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 fir
34%. The expected market return of the S&P 500 is 13% and the 10-Year Treasury note is currently yielding 3.5%.
A
Capital
B
Market Value
$10,000,000
$2,000,000
$8,000,000
$20,000,000
Bonds
Preferred Stock
Common Stock
WACC
Par or Future value:
Present value: -$950.00
Payment $0.00
Coupon rate:
Term:
Rate or Yield on Bond:
C (column B divided by total capital)
Weight in Capital Structure
0%
INPUT
INPUT – This must be a negative number (-950.00)
OUTPUT
INPUT
INPUT
OUTPUT
Cost of Bond
Bond yield
Tax Rate
Cost of Bond
OUTPUT
INPUT
OUTPUT
D (see calculations above)
Cost of Each Component
Cost of Preferred Stock
Dividend
Preferred Stock Price
Cost of Bond
INPUT
INPUT
OUTPUT
Cost of Common Stock Must use CAPM=Risk Free Rate + Beta (Market Return – Risk Free Rate)
Risk Free Rate
Market Rate
Beta
Cost of Bond
INPUT
INPUT
INPUT
OUTPUT
rporation (not real), a software development
rm is considering a new investment in a
‘s capital structure is as follows:
rket price of $950. Preferred stock paying a
nd has a Beta of 1.2. The firm’s tax rate is
%.
C*D
WACC
0.00%

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