As a consultant to GBH skiwear, you have been ask tocompute the appropriate disc

Question

As a consultant to GBH skiwear, you have been ask tocompute 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 ofCaital Market Value Bonds $470,000 PreferredStock $110,000 CommonStock $450,000 To finance the pruchase, GBH will sell 20 year bonds with a 1,000 par value paying 7.5 percent per year (paid semi-annually), at the market price of $953. Preferred stock paying a $2.49 dividend can be sold for $35.67. Common stock for GBH iscurrently selling for $50.77 per share. The firm paid a $3.91 dividend last year and expects dividends to continue growing at a rate of 3.7 percent per year into the indefinate future. The firm's marginal tax rate is 34%. What discount rate should you use to evaluate the warehouse projects?

a. Calculate the weights of capital.

The weight of debt in the firms capital structure is ____% (round to two decimal places)

Explanation / Answer

Answer:

One should always discount at the WACC that is weighted average cost of capital rate to discount the project

WACC = equity /total fund + debt/total fund + preferred stock/ total fund

first to calculate the cost of equity

we can calculate cost of equity by CAPm thats is capital ssest pricing model or dividend discount model ie gordans model

KE= cost of equity = D0/P0+g

=3.91/50.77+.037

ke=11.40% is the cost of equity

cost of debt = coupon rate = 7.5%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.