Purpose of Assignment

Students 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 Steps

Resources: 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:

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%.

1.Determine what discount rate (WACC) Vestor should use to evaluate the warehousing facility project.

2.Assess whether Vestor should make the warehouse investment.

3.Prepare your analysis in a minimum of 700 words in Microsoft^® Word.

4.Use Microsoft^® Word tables in the presentation if you choose.

5.Show all calculations and analysis in the presentation.

*The only portion I need completed ( in 200 words max) is #2 Assess whether Vestor should make the warehouse investment based on the listed information in the scenario*