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:

BONDS: $4,200,000 PREFERRED STOCK: $2,500,000 COMMON STOCK $6,300,000

To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7.4 percent per year (with semiannual payment) at the market price of $1,046. Preferred stock paying a $1.98 dividend can be sold for $24.23. Common stock for Ranch Manufacturing is currently selling for $55.72per share and the firm paid a $2.99 dividend last year. Dividends are expected to continue growing at a rate of 4.8percent 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?

A) The weight of debt in firms capital structure, weight of preferred stock, weight of common stock.

B) Calculate component costs of capital ; aftertax cost of debt, cost of preferred stock, cost of common equity.

C) Calculate the firms weighted average cost of capital ; discount rate you should use to evaluate the equipment purchase is...??