Problem:

AS a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to computer 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 fo the firm's capital structure as follows. To finance the purcahse, Ranch Manufacturing will sell 10-year bonds paying 7.1% per year at the market price of $1,026. Preferred stock is paying $2.08 dividend can be sold for $25.45. Common stock for Ranch Manufacturiing is currently selling for $55.23 per shar and the firm paid a $2.91 dividend last year. Dividens are expected to continue growing at a rate of 5.5% per year into the indefinite future.

Required:

Question: If the firm's tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?

Note: Provide support for rationale.