Evaluate the equipment purchase

Reference no: EM13257998

As a membe of the finance department of Ranch 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 $4,300,000

Preferred Stock $1,800,000

Common stock $ 6,400,000

To finance the purchse Ranch Manufacturing, will sell 10 year bonds paying 7.1% per year at the market price of $1,035. Preferred stock paying a $2.07 dividend can be sold for $24.72. Common stock for Ranch Manufacturing is currently selling for $54.22 per share and the firm paid a $2.94 dividend last year. Dividends are expected to continue growing at a rate of 5.4% 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?

Reference no: EM13257998

Questions Cloud

Determine how a firms breakeven point is affected : Supposing that all other factors remain unchanged, determine how a firm's breakeven point is affected by each ofthe following:

Explain a mixture of two miscible solvents that may be used : A mixture of two miscible solvents that may be used as the solvent for a recrystallization experiment would be which of the following

Indicate effect of transaction on accounting equation : Indicate the effect of each transaction on accounting equation by listing the numbers identifying the transactions, (1)through (10), in a vertical colum.

Evaluate the equipment purchase : If the firm's tax rate is 30% what discount rate should you use to evaluate the equipment purchase?

Definitions of culture and society : Definitions of CULTURE and SOCIETY

Prepare a report examining the cage : You have been hired by a New Jersey-based company that has, until now, competed only in the U.S. market. Due to increased competition in the U.S. market, they now desire to go overseas.

Compute the minimum ph difference between the stroma : Calculate the minimum pH difference between the stroma and lumen, so that three protons passing through an ATP synthase would provide enough energy for the generation of one ATP molecule

Unamortized bond discount question : Kitel uses the effective interest method of amortizingbond discount. Interest is payable annually on June 30. At June 30,2007, Kitel's unamortized bond discount should be

User Account

All Pages