Reference no: EM131402549
Calculate WACC (weighted average cost of capital) using the CAPM (capital asset pricing model) to assess whether a company should make an investment
Determine what discount rate (WACC) the company should use to evaluate the investment
- Warehouse facility believes it will generate an internal rate of return of 11.5%
The market value of the company's capital structure is as follows:
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Source of Capital
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Market Value
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Bonds
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$10,000,000
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Preferred Stock
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$2,000,000
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Common Stock
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$8,000,000
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What the company used to finance the investment:
- 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 is currently selling for $50 per share and has a beta of 1.2
- Tax rate is 34%
- Expected market return of the S&P 500 is 13%
- 10-Year Treasury note is currently yielding 3.5%
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