(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows: To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7.1 percent per year (with semiannual payment) at the market price of $1,039. Preferred stock paying a $2.09 dividend can be sold for $24.18. Common stock for Ranch Manufacturing is currently selling for $55.92 per share and the firm paid a $2.96 dividend last year. Dividends are expected to continue growing at a rate of 4.9 percent per year into the indefinite future. If the firm's tax rate is 30 percent, what discount rate should you use to evaluate the equipment purchase? a. Calculate component weights of capital. The weight of debt in the firm's capital structure is %. (Round to two decimal places.) Data table Source of Capital Bonds Preferred stock Common stock Market Values $3,700,000 $2,000,000 $5,600,000 (Click on the icon in order to copy its contents into a spreadsheet.) -
(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows: To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7.1 percent per year (with semiannual payment) at the market price of $1,039. Preferred stock paying a $2.09 dividend can be sold for $24.18. Common stock for Ranch Manufacturing is currently selling for $55.92 per share and the firm paid a $2.96 dividend last year. Dividends are expected to continue growing at a rate of 4.9 percent per year into the indefinite future. If the firm's tax rate is 30 percent, what discount rate should you use to evaluate the equipment purchase? a. Calculate component weights of capital. The weight of debt in the firm's capital structure is %. (Round to two decimal places.) Data table Source of Capital Bonds Preferred stock Common stock Market Values $3,700,000 $2,000,000 $5,600,000 (Click on the icon in order to copy its contents into a spreadsheet.) -
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
A2
Transcribed Image Text:(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your
supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new
packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the
appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure
as follows:
To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7.1 percent per
year (with semiannual payment) at the market price of $1,039. Preferred stock paying a $2.09 dividend can be sold
for $24.18. Common stock for Ranch Manufacturing is currently selling for $55.92 per share and the firm paid a
$2.96 dividend last year. Dividends are expected to continue growing at a rate of 4.9 percent per year into the
indefinite future. If the firm's tax rate is 30 percent, what discount rate should you use to evaluate the
equipment purchase?
a. Calculate component weights of capital.
The weight of debt in the firm's capital structure is %. (Round to two decimal places.)
Data table
Source of Capital
Bonds
Preferred stock
Common stock
Market Values
$3,700,000
$2,000,000
$5,600,000
(Click on the icon in order to copy its contents into a spreadsheet.)
-
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