A more senior analyst and a mentor to Ms. Franklin, to review this from end-to-end and identify and address any financial analysis problems. As a mentor to Ms. Franklin and as a senior analyst you have a vested interest in solving this effectively. You are asked to evaluate the following:
1.Why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers?
2.Do you agree with Ms. Franklin’s calculations? If yes, then justify why. If not, then what is your estimate of the WACC? Are there any errors made in Ms. Franklin’s analysis ? Show workings and justify your assumptions.
3.Which method is better suited for calculating the cost of equity in this case? What are the advantages and disadvantages of each method?
4.Would you recommend Mrs. Sims proposes an investment in AA? Justify your answer.
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