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:
To finance the? purchase, Ranch Manufacturing will sell 10?-year bonds paying interest at a rate of 7.3 percent per year? (with semiannual? payment) at the market price of ?$1,054. Preferred stock paying ?$2.04 dividend can be sold for ?$24.76 Common stock for Ranch Manufacturing is currently selling for ?$55.66 per share and the firm paid a ?$3.05 dividend last year. Dividends are expected to continue growing at a rate of 5.1 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?
Source of Capital Market Values
Bonds 3,500,000
Preferred Stock 2,300,000
Common Stock 6,300,000
a. Calculate component weights of capital. The weight of debt in the? firm's capital structure is %?. ?(Round to two decimal? places.)