As a member of the Finance Department of Tall Manufacturing, your supervisor has asked you...
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Finance
As a member of the Finance Department of Tall 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:
Source of capital
Market values
Bonds
3,600,000
Preferred stocks
2,000,000
Common stocks
6,000,000
To finance the purchase, Tall Manufacturing will sell 10-year bonds paying interest at a rate of 7.1 percent per year at the market price of $1,066. Preferred stock paying a $1.83 dividend can be sold for $23.87. Common stock for Tall Manufacturing is currently selling for $58.69 per share and the firm paid a $3.48 dividend last year. Dividends are expected to continue growing at a rate of 4.5 percent per year into the indefinite future. If the firm's tax rate is 34 percent, what discount rate should you use to evaluate the equipment purchase?
Answer with the equation please, thank you!
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