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%.
Determine what discount rate (WACC) Vestor should use to evaluate the warehousing facility project. And why you chose that rate
Assess whether Vestor should make the warehouse investment.
Prepare your analysis in 400 words in Microsoft® Word.
Use Microsoft® Word tables in the presentation if you choose.
Show all calculations and analysis in the presentation (if using Word (step-by-step calculations are needed; not the equation and the solution – you needs to show how they derived the final solution?).
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