(Weighted average cost of capital) As a member of the finance department of YooHoo Textiles, 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 firms present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firms capital structure as follows:

Source of Capital	Market Values
Bonds	$3,700,000
Preferred Stock	$2,400,000
Common Stock	$6,200,000

To finance the purchase, YooHoo Textiles will sell 10 year bonds paying 6.9% per year at the market price of $1,069.

Preferred stock paying a $1.96 dividend can be sold for $25.53.

Common stock for YooHoo Textiles is currently selling for $54.67 per share and the firm paid a $2.99 dividend last year. Dividends are expected to continue growing at a rate of 4.9% per year into the indefinite future.

The firms tax rate is 21%.

What discount rate should you use to evaluate the equipment purchase?

The WACC combines the after-tax cost of financing for each of the firms sources of capital. The weights are proportionate to the relative importance of each source in the firms capital structure, based on market, not book, values.Step One: Calculate Capital Structure That is, what is D/V, P/V and E/V in the above equation?

Step Two: Calculate opportunity cost for each source of capital. That is, what are investors expected return on the companys bonds, preferred stock, and common stock?

Step Three: Calculate weighted average cost of capital. That is, input the variables you calculated in the first two steps into the WACC formula.