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Calculating the appropriate discount rate

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To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.7% per year at the market price of $1,037. Preferred stock paying $1.92 dividend can be sold for $24.22. Common stock for Ranch Manufacturing is currently selling for $55.25 per share and the firm paid a $2.94 dividend last year. Dividends are expected to continue growing at a rate of 5.2% per year into the indefinite future. If the firm's tax rate is 30% what discount rate should you use to evaluate the equipment purchase?

Bonds Market Value: $4,400,000; Preferred Stock value is $2,400,000; Common Stock value is $6,000,000

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Solution Summary

The solution depicts the steps to estimate WACC in the given case. The expert provides the solution in an excel sheet with given equations.

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Bond's Market Value=Mb= 4400000
Prefered stock's Market Value=Mp= 2400000
Common stock's Market Value=Mc= 6000000
Total Market Value=M=Mb+Mp+Mc= 12800000

Weight of Bonds=Wb=Mb/M= 0.3438
Weight of Prefered ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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