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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 Preview

    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 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.