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
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 shouldnt make the investment warehouse.
Prepare your analysis in a minimum of 700 words in Microsoft® Word.
Use Microsoft® Word tables in the presentation if you choose.
Show all calculations and analysis in the presentation.