Question

​(Weighted average cost of​ capital)  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:  

Source of Capital	Market Values
Bonds	​$3 900,000
Preferred stock	​$2,500,000
Common stock	​$6,100,000

To finance the​ purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 6.6 percent per year​ (with semiannual​ payment) at the market price of $1,028.Preferred stock paying a $1.96 dividend can be sold for $25.71 Common stock for Ranch Manufacturing is currently selling for $54.05 per share and the firm paid a $3.02 dividend last year. Dividends are expected to continue growing at a rate of 5.4 percent 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.  Calculate component weights of capital.

The weight of debt in the​ firm's capital structure is . ​(Round to two decimal​ places.)

The weight of preferred stock in the​ firm's capital structure is . ​(Round to two decimal​ places.)

The weight of common stock in the​ firm's capital structure is . ​(Round to two decimal​ places.)

b.  Calculate component costs of capital.

The​ after-tax cost of debt for the firm is . ​(Round to two decimal​ places.)

The cost of preferred stock for the firm is . ​(Round to two decimal​ places.)

The cost of common equity for the firm is . ​(Round to two decimal​ places.)

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

The discount rate you should use to evaluate the equipment purchase is nothing​ . ​(Round to three decimal​ places.)

Answer 1