WACC-and-Corporate-Investment-Decisions
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 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.
***** I have already completed and attached the calculations. I just need the analysis. Word count is not of importance. If you can analyze the information well enough in 300-400 words, that is fine.****
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