Question
This is the assignment description. Scenario: You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a
This is the assignment description.
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%.
Below is how far I have gotten, but need some guidance. I am on the right path? What is the next step? I have it in a spreadsheet, but I cannot paste it here
Source of Capital Market Value Annual Dividend Price per Share Beta Percentage of Total Cost of Specific Capital Weighted Cost of Capital Bonds $10,000,000 0.5 Preferred Stock $2,000,000 $2.50 $25.00 0.1 Common Stock $8,000,000 $50.00 1.2 0.4 $20,000,000 Internal Rate of Return 11.50% Tax Rate 34% Expected Market Return S&P 500 13% 10 Yr Treasury Note Yield 3.5% 20 Year Bonds: Par value $1,000 Coupon rate 6.00% Market Price $950 Weighted Average Cost of Capital (WACC) = Cost of Equity + Cost of Debt(after taxes) Cost of Equity =(Equity Risk Premium x Beta) +Risk Free Rate Percentage of Total= Specific Market Value/Total Market Value Cost of Preferred Stock= Annual Dividend/Market Price*100 = 10% Cost of Common Stock = Risk free rate(Rf)+ [Market Rate of Return(Rm) - Risk free rate(Rf)]*Beta Yield to Maturity on Bond = [Coupon Amount+[Redemption amount-rice]/n]/(Redemption amount + price)/2= [60(1-.34)+[1000-950]/20]/(1000+950)/2=42.1/950=
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