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: To finance the​ purchase, Ranch Manufacturing will sell 10​-year bonds paying interest at a rate of 7.2 percent per year​ (with semiannual​ payment) at the market price of ​$1 comma 044. Preferred stock paying a ​$2.02 dividend can be sold for ​$24.97. Common stock for Ranch Manufacturing is currently selling for ​$54.31 per share and the firm paid a ​$3.09 dividend last year. Dividends are expected to continue growing at a rate of 5.3 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   $6,000,000

a.  Calculate component weights of capital.

The weight of debt in the​ firm's capital structure is ?

Answer 1