As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to

Question:

As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:

Source of CapitalMarket Value

Bonds ...........$500,000

Preferred stock .........$100,000

Common stock .........$400,000

To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8 percent per year (paid semiannually) at the market price of $950. Preferred stock paying a $2.50 dividend can be sold for $35. Common stock for GBH is currently selling for $50 per share. The firm paid a $4 dividend last year and expects dividends to continue growing at a rate of 4 percent per year into the indefinite future. The firm’s marginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...