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 themarket value of the firm's capital structure as follows: Source ofCaital Market Value Bonds $470,000 PreferredStock $140,000 CommonStock $410,000 To finance the pruchase, GBH will sell 20 year bonds, with a $1000 par value paying 7.% per year (paid semiannually), at the market price of $944. Preferredstock paying a $2.54 divodend can be sold for $34.45. Common stock for GBH iscurrently selling for $50.92 per share. The firm paid a $4.02 dividend last year and expects dividends to continue growing at a rate of 4.1%per year into the indefinite future. The firm's marginal tax rate is 34%. What discount rate should you use to evaluate the warehouse project?

The weight of debt in the firms capital structure is ___%

Explanation / Answer

Stock price = D1÷(r-g)

D1 is next expected dividend

r is cost of common stock

g is growth rate

$50.92 = $4.02×(1+4.1%)÷(r-4.1%)

Cost of common stock = 12.32%

Cost of preference share:

= $2.54÷$34.45

= 7.37%

Face value (FV) $                                1,000.00 Coupon rate 7.00% Number of compounding periods per year 2 Interest per period (PMT)                                           35.00 Bond price (PV) $                                  (944.00) Number of years to maturity                                           20.00 Number of compounding periods till maturity (NPER) 40 Bond Yield to maturity RATE(NPER,PMT,PV,FV) Bond Yield to maturity 7.55% RATE(40,35,-944,1000)*2

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