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: 

To finance the​ purchase, Ranch Manufacturing will sell 10​-year bonds paying interest at a rate of 6.7 percent per year​ (with semiannual​ payment) at the market price of ​$1,062. Preferred stock paying a $1.94 dividend can be sold for ​$25.84. Common stock for Ranch Manufacturing is currently selling for ​$54.58 per share and the firm paid a ​$2.99 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?

The weight of debt in the​ firm's capital structure is 30.97%

The weight of preferred stock in the​ firm's capital structure is 20.35%

The weight of common stock in the​ firm's capital structure is 48.67%

b.  Calculate component costs of capital.

The​ after-tax cost of debt for the firm is________________

Answer 1