Wilson Corporation

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:

Calculate the company’s weighted average cost of capital. Use the dividend discount model. Show calculations 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

………………Answer preview………………………..

Weighted Average Cost of Capital (WACC) = r (E)×w (E) + r (D) × (1 – t)×w (D)

Where r (E)     = cost of equity

            w (E)   = weight of equity in a company’s total capital

r (D) ×1 – t      = after tax cost of debt

            w (D)   =weight of the company’s debt

Cost of equity (DDM)            =

                                                                        = = 0.0481 = 4.81%

                        Cost of debt                            =0.06 × (1 –0.35) = 0.039 = 3.9%

                                                WACC            = 60% × 4.81% +…………………………………..

APA

710 words