Question
As a consultant to GBH skiwear, you have been ask to compute the appropriate discount rate to use to evalute thepurchase of a new warehouse
As a consultant to GBH skiwear, you have been ask to compute the appropriate discount rate to use to evalute thepurchase of a new warehouse facility. You have determined the market value of the firm's capital structure as follows:
Source of Capital | Market Value |
Bonds | $540,000 |
Preffered Stock | $110,000 |
Common Stock | $420,000 |
To finance the pruchase, GBH will sell 20 year bonds with a $1,000 par value paying 7.8 percent per year, at the market price of $965. Preferred stock paying a $2.59 divodend can be sold for $34.55. Common stock for GBH is currently selling for $49.31 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 4.4% per year. The firm's marginal tax rate is 34%. What discount rate should you use to evaluate the warehouse projects?
Solve the following:
a. Calculate component weights of capital
1. The weight of debt in the firm's capital structure is ____%?
2. The weight of preferred stock in the firm's capital structure is____%
3. The weight of common stock in the firm's capital structure is ___%
b. Calculate component costs of capital.
1. The after-tax cost of debt for the firm is ___%
2. The cost of preferred stock for the firm is __%
3. The cost of common equity for the firm is ___%
c. Calculate the firm's weighted average cost of capital.
1. The discount rate you should use to evaluate the warehouse project is ___%
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