Source of capital market value

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Reference no: EM13728754

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 $510,000

Preferred stock $150,000

Common stock $430,000

To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 7.7% per year at the market price of $934. Preferred stock paying a $2.48 dividend can be sold for $34.82. Common stock for GBH is currently selling for $49.43 per share. The firm paid a $3.98 dividend last year and expects dividends to continue growing at a rate of 3.6% 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?

Reference no: EM13728754

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