Home Insert Draw Page Layout Formulas Data Review View Tell me X Arial 11 ' == Wrap Paste v . a. Av Merge 119 A Y XV B E F H D P14-27 Modified (changes from the text are in bold) 1 2 3 4 5 6 7 8 9 10 11 You are working in the Finance Department of Ranch Manufacturing, and 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 shown below. To finance the purchase, Ranch Manufacturing will sell 12-year bonds with a $1,000 par value paying interest at a rate of 6 percent per year (with semiannual payments) at the market price of $950. Preferred stock paying a $2.00 dividend can be sold for $25. Common stock for Ranch Manufacturing is currently selling for $48 per share and the firm paid a $3 dividend last year. Dividends are expected to continue growing at a rate of 5 percent per year into the indefinite future. If the firm's tax rate is 25 percent, what discount rate should you use to evaluate the equipment purchase? 12 13 14 15 16 17 18 19 20 21 Market Value Weight Cost WC Source of Capital Bonds Preferred Stock Common Stock 23 24 25 26 27 Cost of Debt Coupon Rate Years 29 10 31 32 Par Value PMT NPER Price (PV) 35 YTM (Semi Annual) YTM (Annual) Tax Rate D E F G B 24 Cost of Debt 25 26 27 28 29 30 Coupon Rate Years 31 32 33 Par Value PMT NPER Price (PV) 34 35 36 37 38 39 40 41 YTM (Semi Annual) YTM (Annual) Tax Rate After Tax Cost of Debt Cost of Preferred Stock 43 Market price Dividend 46 Cost of Preferred Stock 48 49 Cost of Common Equity 51 market price DO G D1 53 54 Cost of Common Equity 50