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WACC and Corporate Investment Decisions

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Scenario: Wilson Corporation (not real) has a targeted capital structure of 45% long term debt and 55% common stock. The yield to maturity for bond holders is 5.5% and the corporate tax rate is 33%. The common stock is trading at $30 per share and next year’s dividend is $2.40 per share that is growing by 3.5% per year.

Prepare a minimum 700-word analysis including the following:

· Calculate the company’s weighted average cost of capital. Use the dividend growth 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 you would advise the CEO.