Question

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?

Answer 1

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