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 Capital / Market Value
Bonds / $520,000
Preferred Stock / $110,000
Common Stock / $400,000
To finance the purchase, GBH, will sell 20-year bonds with a $1,000 par value paying 8.2 percent per year (paid semiannually) at the market price of $967. Preferred stock paying a $2.56 dividend can be sold for $35.15. Common stock for GBH is currently selling for $49.43 per share. The firm paid a $4.04 dividend last year and expects dividends to continue $2.56 dividend can be sold for $35.15. Common stock for GBH is currently selling for $49.43 per share. The firm paid a $4.04 dividend last year and expects dividends to continue growing at a rate of 3.9 percent per year into the indefinite future. The firms’ magical tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project?
a. Calculate component weights of capital
The weight of debt in the firm’s capital structure is ___% (round to two decimal places)
The weight of preferred stock in the firm’s capital structure is ___% (round to two decimal places)
The weight of common stock in the firm’s capital structure is ___% (round to two decimal places)
b. Calculate component of capital.
The after-tax cost of debt for the firm is ___% (round to two decimal places)
The cost of preferred stock for the firm is ___% (round to two decimal places)
The cost of common equity for the firm is ___% (round to two decimal places)
c. Calculate the firms weighted average cost of capital.
The discount rate you should use to evaluate the warehouse project is ___% (round to two decimal places)