Question 2

PART A

To assist with evaluating potential capital projects, Virtuoso Corporation is seeking to determine its actual Weighted Average Cost of Capital (WACC).

Utilising information from the financial statements presented on page 2, together with current information, the Finance Manager has compiled the following information as it pertains to the companys capital structure:

Debt:

Bonds outstanding have a face value of $2,761,905, currently selling at 105% of par. These bonds have 25 years left to maturity and a coupon rate of 10%. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only)

Common stock

40,000 shares of common stock outstanding with a market price of $40.00. The company intends to pay a dividend of $5.00 next year; for ease of computation, dividends are expected to grow by 4% annually.

Additional Information: The Companys tax rate is 30%.

Required: Calculate the Weighted Average Cost of Capital for Virtuoso Corporation.

PART B

The Finance Manager is trying to ensure that the companys excess cash holdings are all invested in interest-bearing short-term instruments. Virtuosos bankers have provided details on enhanced savings accounts that is offered to business clients:

Option 1: Annual interest rate of 8.15%, compounded monthly.

Option 2: Annual interest rate of 8.25%, compounded quarterly.

Required: Advise the Finance Manager on the best option.