24 SECTION VI: YOU BETA BELIEVE EDUCATION MATTERS Questions 13-16 (60 points total) On October 10, 2017, Bryan Foster the CFO of Laureate Education hung up the phone and sat back in his chair. His daughter Asha was incredibly stressed about the upcoming finance midterm in her MBA program at Georgetown University. He shook his head knowing that he too had a finance challenge ahead of him. Laureate had just undergone an Initial Public Offering (IPO) eight months ago in February 2017. Going public would allow Laureate to better compete with its primary competitor Capella Education, which had been public for many years. Stock returns for both companies and the S&P 500 for the last four years are shown in Exhibit 10. The variance-covariance matrix associated with those returns is shown in Exhibit 11Both companies operated adult learning courses both online as well as on physical campuses located in densely populated metropolitan areas. Although Laureate did not have as good coverage in Philadelphia, New York and Boston as Capella; it was planning to acquire and build out on-site campuses in these cities to better compete with Capella. Since this would require a significant capital investment, Bryan wanted to determine what rate of return would be acceptable for a long-term investment of this kind. Given that the investment was similar to the existing line of business, Bryan determined that a weighted average cost of capital (WACC) would be the appropriate benchmark rate. Bryan’s staff had put together a comparative analysis of Laureate and Capella. Basic balance sheet information for the two companies are shown in Exhibit 12, while Exhibit 13 gives details of stock price and bond prices for the two companies. Laureate was currently at is target capital structure. Historical returns on various asset classes are shown in Exhibit 14, while the current rates on select Treasuries are shown in Exhibit 15. .