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 $1.723B 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?

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?Part 2:

Answer 1

Part 1

WACC Formula = (E/V * Ke) + (D/V) * Kd * (1 – Tax rate)

• E = Market Value of Equity
• V = Total market value of equity & debt
• Ke = Cost of Equity
• D = Market Value of Debt
• Kd = Cost of Debt
• Tax Rate = Corporate Tax Rate

Therefore WACC = .38*2.65% + .62*4.3192(1-.12) =3.36%.

In order to accept or reject the plan to renovate we must calculate IRR of the Plan

The IRR formula is as follows:

Accordingly IRR comes to 11.53%

Now as we see that IRR > WACC i.e 11.53 > 3.36%. Hence the proposal is accepted.