Question
I need some guidance on this scenario: Scenario:You work for an investment banking firm and have been asked by management of Vestor Corporation (not real),
I need some guidance on this scenario:
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:BondsMarket Value:$10,000,000
Source of Capital:Preferred StockMarket Value:$2,000,000
Source of Capital:Common StockMarket Value:$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%.
I need help trying to figure out the discount rate (WACC) Vestor should use to evaluate the warehousing facility project.
I also need help figuring out ifVestor should make the warehouse investment.
Anything helps. I need as much through guidance as possible. Please show/explain all answers and suggestions you give.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started