Question

In: Finance

Part 1 Compute the weighted cost of capital (WACC) of Wendy's (WEN) show how to compute...

Part 1

  1. Compute the weighted cost of capital (WACC) of Wendy's (WEN)
  2. show how to compute the WACC
  3. Once you know the WACC for Wendy's (WEN), using the WACC as a cutoff, you should make a decision whether or not you accept the following project

Wendy's has 230.23 million shares of stock outstanding. The book value per share is $2.80, but the stock sells for $16.63. Total equity is 648.45M on a book value basis. The cost of equity using CAPM is 15.38%. Analyst estimate the growth in earnings per share for the company will be 10.30% for the next five years. The cost of equity using the dividend discount model is 2.65%.

Past Dividends
Year Dividend Percentage Change
2018 $0.085 1.9%
2017 $0.07 1.9%
2016 $0.065 2.0%
2015 $0.055 2.4%
2014 $0.05 2.5%

Wendy's cost of debt is 4.3192%. The book value basis, of Wendy's equity and debt are worth $1.723B and $2.758M respectively. The total value is $4.481B. So the equity and debt percentages are 0.38 and 0.62. Assuming a tax rate of 12%, Wendy's WACC is?

Part 2

As the president of Wendy's, you should determine whether to go ahead with a plan to renovate the company’s distribution system. The plan will cost the company $50 million, and it is expected to save $12 million per year after taxes over the next six years. Will you accept? Or Reject?

Solutions

Expert Solution

After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 4.3192*(1-0.12)
'= 3.800896
Weight of equity = 1-D/A
Weight of equity = 1-0.62
W(E)=0.38
Weight of debt = D/A
Weight of debt = 0.62
W(D)=0.62
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=3.8*0.62+15.38*0.38
WACC% = 8.2
Discount rate 8.200%
Year 0 1 2 3 4 5 6
Cash flow stream -50 12 12 12 12 12 12
Discounting factor 1.000 1.082 1.171 1.267 1.371 1.483 1.605
Discounted cash flows project -50.000 11.091 10.250 9.473 8.755 8.092 7.479
NPV = Sum of discounted cash flows
NPV project = 5.14
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor

accept project as NPV is positive


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