(WACC)As a member of the financial department of rack record,your supervisor has

Question

(WACC)As a member of the financial department of rack record,your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of a new packaging equipment for the plant.Under the assumption that the firms present capital structure reflects the appropriate mix of capital sources for the firm,you have determined the market value of the firms capital structure as follows(Bonds-3,5000,000,preferred stock-2,2000,000,common stock-6,4000,000).To finance the purchase,rack records will sell 10-year bonds paying 6.9% per year at the market price of 1,067.preferred stock paying a $2.09 dividend can be sold for $24.02.Common stock for rack records is currently selling for $54.79 a rate of 5.1 % per year into the indefinite future.If the firms tax rate is 30% what discount rate should you use to evaluate the equipment purchase? Rack records WACC is _______%(round to three decimal places)

Explanation / Answer

bond: 1067= 69PVIFA(r,10)+1000PVIF(r,10), r= 5.99% preferred stock rate= 2.09/24.02, r= 8.7% Common stock rate 54.79= 3.07/(Ke-.051) Ke= 10.70% therefore, WACC= (35/121x5.99x.7)+(22/121x8.7)+(64/121x10.7)= 8.607%

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