Use evaluation of the purchase of a new warehouse facility

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Reference no: EM131538554

You are working as a consultant to the Lulu Athletic Clothing? Company, and 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-$250,000

Preferred Stock $240,000

Common Stock $520,000

To finance the? purchase, Lulu will sell

20 year bonds with a ?$1000 par value paying 5.8 percent per year? (with interest paid? semiannually) at the market price of $1019.Preferred stock paying a ?$2.58 dividend can be sold for?$35.48 Common stock for Lulu is currently selling for ?$49.03 per share. The firm paid a ?$3.94 dividend last year and expects dividends to continue growing at a rate of 3.6 percent per year for the indefinite future. The? firm's maginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse? project?

a. Calculate component weights of capital.

The weight of debt in the? firm's capital structure is _____

The weight of preferred stock in the? firm's capital structure is ______

The weight of common stock in the? firm's capital structure is______

b. Calculate component costs of capital.

The? after-tax cost of debt for the firm is

?The cost of preferred stock for the firm is

The cost of common equity for the firm is

c. Calculate the? firm's weighted average cost of capital.

The discount rate you should use to evaluate the warehouse project is

Reference no: EM131538554

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