Fin 370 Week 2 Team Assignment Rubric

QUESTION AND PROBLEM SETS3r = (FV/PV) ^1/t -11. r = (297/181) ^1/4 -1 = (1.641) ^1/4 -1 = 1.1318 -1 = 0.1318 or 13.18%2. r = (1,080/335) ^1/18 -1 = 1.0672 -1 = 0.0672 or 6.72%3. r = (185382/48000) ^1/19 -1 = (3.862)^1/19 -1 = 1.0737 -1 = 0.0737 or 7.37%4. r = (531616/40353) ^1/25 -1 = (13.174)^1/25 -1 = 1.1086 -1 = 0.18086 or 10.86%Chapter 6Question 2. Present Value and Multiple Cash Flows [LO1] Investment X offers to pay you $4,700 per year for eight years, whereas Investment Y offers to pay you $6,700 per year for five years. Which of these cash flow streams has the higher present value if thediscount rate is 5 percent? If the discount rate is 15 percent?PVA = C ({1-[1/(+r)^t]}/r)A 5% interest rateX at 5%: PVA = 4700 { [1- (1/1.05)^8 ] /.05} = $30377.10Y at 5%: PVA = 6700 { [1- (1/1.05)^5 ] /.05} = $29007.49At 15% interest:X at 5%: PVA = 4700 { [1- (1/1.15)^8 ] /.15} = $21090.41Y at 5%: PVA = 6700 { [1- (1/1.05)^5 ] /.15} = $22459.44CorrectQuestion 20. Calculating Loan Payments [LO2, 4] You want to buy a new sports coupe for $79,500, and the finance office at the dealership has quoted you an APR of 5.8

Unformatted text preview: Running head: WEEK FOUR TEAM ASSIGNEMENT 1 Week 4 Team Assignment – Vector Weighted Average Cost of Capital (Joseph Andre, Richard Daoedsjah, Lilianna Ribarska, Lindsey Santos, Carlette Young, Octavio Marquez) FIN/370 January 29, 2018 Rich Tappe 2 Vector Weighted Average Cost of Capital Introduction The Vestor Corporation, which specializes in software development, is considering making some new investments within its company. This investment would be a warehousing facility, which they believe would generate an internal rate of return of 11.5 percent. Our investment-banking firm has been tasked with helping the Vestor Corporation in determining its weighted average cost of capital (WACC); this will help evaluate the potential new investment for the company. Our team will calculate this cost by using the capital asset pricing model (CAPM). Vestor Warehouse Project Information Our investment-banking team has been provided the following back ground information. This information will be used for both the calculations and analyzing that are necessary for the investment decision. Below we can see the market value of Vestor’s capital structure: Source of Capital Bonds Preferred Stock Common Stock Market Value $10,000,000 $2,000,000 $8,000,000 In order to finance the investment, the Vestor Corporation is offering the following: Issued 20-year bonds with a $1,000 par value, 6 percent coupon rate and a market price of $950. Preferred Stock is paying $2.50 annual dividend sold for $25 per share. Common Stock is currently trading at $50 per share. The Recommended Weighted Average Cost of Capital (WACC) 3 The general rule for corporations and investors is that if the earnings on capital are more than the cost of capital from a project, then the project is worth the investment and/or risk. (Investopedia, 2017). Evaluating the company’s debt and equity and determine the market values gives the best scenario for determining if the warehouse facility is a worthwhile investment project. Determine the discount rate (WACC) Vestor should use According to phoenix.vitalsource.com, the weighted average cost of capital (WACC) is the overall return the firm must earn on its existing assets to maintain the value of its stock. It is also the required return on any of the investments from the firm that have basically the same amount of risks as the existing ones. Upon calculating the cash flows from the given expansion, this is the discount rate that should be used by Vestor. WACC is calculated by multiplying the capital structure weights by the associated costs and then we would add them together. Once this step is completed, we get the Vestor’s discount rate (WACC) which is 9.09%. This is the discount rate (WACC) that the Vestor Corporation needs to use in order to properly evaluate the warehousing facility project. WACC Formula: WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)] E = Market value of the company's equity D = Market value of the company's debt V = Total Market Value of the company (E + D) Re = Cost of Equity 4 Rd = Cost of Debt T= Tax Rate Analysis was conducted on the company using the Capital Asset Pricing Model (CAPM). This model is used to describe the relationship between the systematic risks and returns on Vector capital assets. Bond Analysis The before tax cost of equity can be calculated by using the yield to maturity or the bonding rating. The yield to maturity rating allows the firm to identify the rate of return to bondholders over the life of the bond. (Jordan, Ross & Westerfield, 2016). Using these calculations from the scenario, the following is determined: YTM=.06(1-.34) = 3.96% Preferred Stock Analysis In calculating the cost of preferred stock for the WACC formula is simple. Preferred stock is the preferred stockholders required rate of return. (Jordan, Ross & Westerfield, 2016). The cost of preferred stock was calculated using the scenario as follows: Rp=$2.50/$25=10% Common Stock Analysis 5 Vector has a required rate of return of 13%. The cost of equity is used to determine the cost of equity financing for the firm. (Jordan, Ross & Westerfield, 2016). The cost of equity will help determine the total anticipated cost of capital. 3.5%+ (1.2*.13)=19.1% Assessment Argument for or against the investment Vestor Corporation had asked the investment-banking firm to assess and calculate the company’s total weighted average cost of capital. Vestor Company is considering on getting a new company investment to use in their warehouse facility, in which they do believe that it will help the company by producing an internal return rate of return totaling 11.5%. However, the banking investment firm would first consider many elements in order to appropriately give the Vestor Company any advise to whether or not Vestor Company should make the investment. First of all, the Internal Rate of Return must first determined and must see if the IRR is significantly greater than the total Weighted Average Cost of Capital or WACC. Having said that, if the Internal Rate of Return is more than the Weighted Average Cost of Capital, then cash flow will clearly increase, and will of course count as an addition to shareholders equity in which investment should be made and consider. After carefully analyzing, it shows that the calculation provided was an IRR of 11.5%, which is better than the WACC of 9.10%, and this should give enough information, and Vestor Company should consider and make the warehouse investment. Conclusion (Conclusion paragraph)The closing paragraph is designed to bring the reader to your way of thinking if you are writing a persuasive essay, to understand relationships if you are writing a comparison/contrast essay, or simply to value the information you provide. 6 7 References Jordan, B., Ross, S., & Westerfield R. (2016). Fundamentals of Corporate Finance (11th ed.). New York, NY: McGraw-Hill. Investopedia, 2017.Retrieved from https://www.investopedia.com/terms/r/returnonequity.asp Bookshelf Online. (n.d.). Retrieved January 28, 2018, from https://phoenix.vitalsource.com/#/books/1259798224/cfi/6/52!/4/4/226/[email protected]:100 ...
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