This question was created from FIN 370 You work for an investment bank


Ask a Question

This question was created from FIN 370 You work for an investment banking firm and have been asked by management of Vestor Corporat https://www.coursehero.com/file/22564347/FIN-370-You-work-for-an-investment-banking-fir

Sale price $15.00 Regular price $30.00

This question was created from FIN 370 You work for an investment banking firm and have been asked by management of Vestor Corporat
https://www.coursehero.com/file/22564347/FIN-370-You-work-for-an-investment-banking-firm-and-have-been-asked-by-management-of-Vestor-Corporat/


22564347-69034.jpeg

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.
Assess whether Vestor should make the warehouse investment.

Questions & Answers

Have a Question?

Be the first to ask a question about this.

Ask a Question