Assume that you are working in the Finance Department, and you want to compute the appropriate discount rate to use when evaluating the purchase of new equipment. You have determined the market value of the firms capital structure as follows:

To finance the purchase, your company will sell 10-year bonds with a yield-to-maturity 6.32%. Preferred stock paying a $2.00 dividend can be sold for $25. Common stock is currently selling for $55 per share, and the firm paid a $3 dividend this year. Dividends are expected to continue growing at a rate of 5 percent per year for the indefinite future. If the firms tax rate is 30 percent, what discount rate (cost of capital, i.e., WACC) should you use to evaluate the equipment purchase?

Source of Capital Bonds Preferred stock Common stock Market Value $4,000,000 $2,000,000 $6,000,000