3) As a consultant to KLM Snow Sports Equipment, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of a new warehouse facility. You have determined the market value of the firm's capital structure as follows: Source of Capital Market Value Bonds $600,000 Preferred Stock $150,000 Common Stock $450,000 To finance the purchase, KLM will sell 20‐year bonds, with a 9% coupon rate and semiannual coupons, at the market price of $940. Flotation costs for issuing the bonds are 3 percent of the market price. Preferred stock paying an annual $3 dividend can be sold for $42; the cost of issuing these shares is $3 per share. Common stock for KLM is currently selling for $54 per share. The firm paid a $2.80 dividend last year and expects dividends to continue growing at a rate of 5 percent per year. Flotation costs for issuing new common stock will be 6 percent of the market price. The firm’s dividends currently equal the net income so there is no internal equity available for the new warehouse. The firm's marginal tax rate is 25 percent. What discount rate should be used to evaluate the warehouse purchase?
3) As a consultant to KLM Snow Sports Equipment, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of a
new warehouse facility. You have determined the market value of the firm's capital structure as follows:
Source of Capital Market
Bonds
Common Stock $450,000
To finance the purchase, KLM will sell 20‐year bonds, with a 9% coupon rate and semiannual coupons, at the market price of $940. Flotation costs for
issuing the bonds are 3 percent of the market price. Preferred stock paying an annual $3 dividend can be sold for $42; the cost of issuing these shares is
$3 per share. Common stock for KLM is currently selling for $54 per share. The firm paid a $2.80 dividend last year and expects dividends to continue
growing at a rate of 5 percent per year. Flotation costs for issuing new common stock will be 6 percent of the market price. The firm’s dividends
currently equal the net income so there is no internal equity available for the new warehouse. The firm's marginal tax rate is 25 percent. What discount
rate should be used to evaluate the warehouse purchase?
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