As a member of the Finance Department of Ranch Manufacturing, your supervisor ha

Question

As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate of use when evaluating the purchase of new packing equipment for the plant. You have determined the market value of the firm's capital structure as follows: Source of Capital Market Values Bonds $4,000,000 Preferred Stock $1,800,000 Common Stock $5,800,000 To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 7.3% per year at the market price of $1,058. Preferred Stock paying $1.98 dividend can be sold $24.12; Common Stock for Ranch Manufacturing is currently selling for $54.14 per share. The firm paid a $2.96 dividend last year and expects dividends to continue growing at a rate of 4.7% per year. The firm's tax rate is 30 percent. What is the WACC?

Explanation / Answer

Bonds will pay 6.7% of Par, or $67 less tax of 30%, or $46.90 / $1,037 = 4.5%
Preferred will pay $2.06 / $25.28 = 8.15%
Common - R = Next Div / Price + G%, or R = 3.18 / 55.27 = 5.75% + 5.4% = 11.15%

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As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate of use when evaluating the purchase of new packing equipment for the plant. You have determined the market value of the firm's capital structure as follows:
Source of Capital Market Values
Bonds $3,500,000
Preferred Stock $1,600,000
Common Stock $6,000,000
To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.7% per year at the market price of $1037. Preferred Stock paying $2.06 dividend can be sold $25.28; Common Stock for Ranch Manufacturing is currently selling for $55.27 per share. The firm paid a $3.02 dividend last year and expects dividends to continue growing at a rate of 5.4% per year into the indefinite future. If the firm's tax rate is 30 percent what discount rate should you use to evaluate the equipment purchase?.

Ranch Manufacturing's WACC is __%? (Round to three decimal places)

Answer:

WACC:
3.5 mil x 4.5% = 157,500
1.6 mil x 8.15% = 130,400
6.0 mil x 11.15% = 669,000
Total Capital of 11.1 mil costs 956,900. WACC = 956,900 / 11.1 mil = 8.6%

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