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 ........... $500,000
Preferred stock ......... $100,000
Common stock ......... $400,000
To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8 percent per year (paid semiannually) at the market price of $950. Preferred stock paying a $2.50 dividend can be sold for $35. Common stock for GBH is currently selling for $50 per share. The firm paid a $4 dividend last year and expects dividends to continue growing at a rate of 4 percent per year into the indefinite future. The firm’s marginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project?

  • CreatedOctober 31, 2014
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