WACC and Corporate Investment Decisions
Purpose of Assignment
Students should understand corporate risk and be able to use the financial models learned in the class to evaluate and calculate a company’s weighted average cost of capital and use the analysis to make company investment decisions.
Scenario: Wilson Corporation (not real) has a targeted capital structure of 40% long term debt and 60% common stock. The debt is yielding 6% and the corporate tax rate is 35%. The common stock is trading at $50 per share and next year’s dividend is $2.50 per share that is growing by 4% per year.
Prepare a minimum 700-word analysis including the following:
- Introduction (very short)
- Calculate the company’s weighted average cost of capital. Use the dividend discount model. Show calculations and formulas in Microsoft® Word.
- The company’s CEO has stated if the company increases the amount of long term debt so the capital structure will be 60% debt and 40% equity, this will lower its WACC. Explain and defend why you agree or disagree. Report how would you advise the CEO.
- Conclusion (very short)
Format your paper consistent with APA guidelines.