As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:
Bonds: $480,000
Preferred stock: $150,000
Common stock: $440,000
To finance the purchase, GBH will sell 20-year bonds with a $1000 par value paying 8.1% per year (paid semiannually) at the market price of $955. Preferred stock paying a $2.52 dividend can be sold for $35.41. Common stock for GBH is currently selling for $50.25 per share. The firm paid a $3.96 dividend last year and expects dividends to continue growing at a rate of 4.1% per year into the indefinite future. The firm’s marginal tax rate is 34%. What discount rate should you use to evalutate the warehouse project?