(Weighted average cost of capital) As a member of the FDP, your supervisor

(Weighted average cost of capital) As a member of the FDP, 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 firms 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:

To finance the purchase, Ranch manufacturing will sell 10-year bonds paying 7.4% per year at the market price of $1,065. Preferred stock paying a $2.01 dividend can be sold for $24.99. Common stock for Ranch Manufacturing is currently selling $54.36 per share and the firm paid a $2.91 dividends last year. Dividends are expected to continue growing at a rate of 4.9% per year into the indefinite future. If the firms tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?

Ranch Manufacturing WACC is _______% (round to three decimal places)

be Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Huston, and San Antonio. To finance the new venture two plans have been proposed: Plan A is an all-common-equity structure in which $2.4 million dollars would be raised by selling 86,000 shares of common stock. Plan B would involve issuing $1.5 million dollars in long-term bonds with an effective interest rate of 11.9% plus $0.9 million would be raised by selling 43,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm’s capital structure. Abe and his partners plan to use a 38% tax rate with their analysis, and they have hired you on a consulting basis to do the following: (A) Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar.) (B) Prepare a pro forma income statement for the EBIT level solved for in part a. that shows that the EPS will be the same regardless whether Plan A or Plan B is chosen. (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)

Source of capital Market values
Bonds $3.6M
Preferred stock $2.M
Common Stock $5.5M

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