Question

 As a member 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: 

BONDS: $4,200,000 PREFERRED STOCK: $2,500,000   COMMON STOCK $6,300,000

To finance the​ purchase, Ranch Manufacturing will sell 10​-year bonds paying interest at a rate of 7.4 percent per year​ (with semiannual​ payment) at the market price of ​$1,046. Preferred stock paying a ​$1.98 dividend can be sold for ​$24.23. Common stock for Ranch Manufacturing is currently selling for ​$55.72per share and the firm paid a ​$2.99 dividend last year. Dividends are expected to continue growing at a rate of 4.8percent per year into the indefinite future. If the​ firm's tax rate is 30 ​percent, what discount rate should you use to evaluate the equipment​ purchase?

A) The weight of debt in firms capital structure, weight of preferred stock, weight of common stock.

B) Calculate component costs of capital ; aftertax cost of debt, cost of preferred stock, cost of common equity.

C) Calculate the firms weighted average cost of capital ; discount rate you should use to evaluate the equipment purchase is...??

Answer 1