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As a consultant to GBH skiwear, you have been ask 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 as follows:
Source of Caital Market Value
Bonds $550,000
Preferred Stock $130,000
Common Stock $400,000
To finance the purchase, GBH will sell 20 year bonds with a $1000 par value paying 8.1 percent per year (paid semi-annually), at the market price of $972. Preferred stock paying $2.41 dividend can be sold for $35.18. Common stock for GBH is currently selling for $49.71 per share. The firm paid a $4.04 dividend last year and expects dividends to continue growing at a rate of 3.8% per year into the indefinite future. The firm's marginal tax rate is 34%. What discount rate should you use to evaluate the warehouse projects? What discount rate should you use to evaluate the warehouse project?
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