Discount rate should you use to evaluate warehouse project

Assignment Help Financial Management

Reference no: EM13727162

As a consultant to GBH skiwear, you have been ask 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 as follows:

Source of Caital Market Value

Bonds $550,000

Preferred Stock $130,000

Common Stock $400,000

To finance the purchase, GBH will sell 20 year bonds with a $1000 par value paying 8.1 percent per year (paid semi-annually), at the market price of $972. Preferred stock paying $2.41 dividend can be sold for $35.18. Common stock for GBH is currently selling for $49.71 per share. The firm paid a $4.04 dividend last year and expects dividends to continue growing at a rate of 3.8% per year into the indefinite future. The firm's marginal tax rate is 34%. What discount rate should you use to evaluate the warehouse projects? What discount rate should you use to evaluate the warehouse project?

Reference no: EM13727162

Questions Cloud

Accounts receivable as shown on the balance sheet : Rocket City Space Camp has annual credit sales of $16 million. The average collection period is 35 days. What is the average investment in accounts receivable as shown on the balance sheet? A. $646,000 B. $824,000 C. $1,408,888 D. $1,534,247 E. $1,69..

What is the risk-neutral probability : Consider a three-period ( t = 0,1, 2, 3 ) binomial option pricing model. There are 3-period put options on the stock. The values of the underlying variables are S = $50, n = 3, K = $48, u =1.1, d = 0.9, r =1.02 (a) what is the risk-neutral probabilit..

Annual pretax cost savings : Purple Haze Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $540,000 is estimated to result in $225,000 in annual pretax cost savings. The press falls in the MACRS five-year class, ..

Capital budgeting criteria : A company has a 12% WACC and is considering two mutually exclusive investment (that cannot be repeated) with the following cas flows: What is each project's NPV ? What is each project's IRR ?

Discount rate should you use to evaluate warehouse project : As a consultant to GBH skiwear, you have been ask to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. What discount rate should you use to evaluate the warehouse project?

What is the after tax cost of capital to walgreen for bonds : The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1000 par value bonds with a 15 year maturity at a price of $951 that carries a coupon interest rate of 13.8 percent that ..

Firms cost of preferred stock financing : The preferred stock of Gator Industries sells for $35.55 and pays $2.74 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 529,000 more preferred shares just like the ones it currently has outstanding, it cou..

Individual component costs of capital : Compute the cost of capital for the firm for the following-A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.9%. Interest payments are $54.50. The bonds have a current market value of $1,120 and will mature ..

Implied price volatility of the underlying stock price : A six-month Twitter call option with an exercise price of $50.00 was traded at $4.25 per option on February 27, 2015. Assume that the risk free rate was 1.2% per year and stock price for Twitter on February 27, 2015 was $48.08. Twitter Inc. does not ..

User Account

All Pages