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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

#### 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.

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